Pound falls sharply versus dollar

LONDON (Reuters) - The pound fell sharply against the dollar on Wednesday, reversing earlier gains as the currency took a hit in thin conditions ahead of results from troubled U.S. bank Lehman Brothers LEH.N.

Lehman has brought forward the release of its quarterly earnings by a week to 12:30 p.m. Wednesday after its shares tumbled by as much as 46 percent on Tuesday on worries about its ability to raise capital.

Concerns about the cash-strapped bank were exacerbated on Wednesday as news emerged that talks with state-run Korea Development Bank KDB.UL have broken down.

"The drop in cable (sterling/dollar) is in indication of illiquidity in the market as people wait to see the Lehman earnings are and what its plans are going forward," said Divyang Shah, currency strategist at CBA.

At 12:08 p.m., the pound was down 0.3 percent on the day at $1.7561 after trading as high as $1.7677 earlier in the global session. The euro firmed to 80.30 pence, having earlier traded as low as 80.11 pence.

The pound has been vulnerable due to concerns that neither the Bank of England nor the UK government will be in a position to help prop up the sharply slowing economy via interest rate cuts or fiscal measures.

"The longer we have to wait for a stimulus the more the risk increases of a deeper and more lengthy recession," Shah said.

Forecasts from a leading UK think tank on Wednesday highlighted recession risks facing the UK. The National Institute of Economic and Social Research said the economy contracted by 0.2 percent in the three months to August after a 0.1 percent fall in GDP in the three months to July.

Other data showed that Britain's trade deficit narrowed slightly in July, but stayed larger than economists had forecast nLA116821. The oil deficit hit a new record and June's gap was revised up.

(Reporting by Jessica Mortimer; editing by Chris Pizzey)