Sterling falls sharply after BoE's King comments

LONDON, Nov 11 (Reuters) - Sterling fell to session lows against the dollar and the euro on Wednesday after Bank of England governor Mervyn King said a weak pound would help the UK economy rebalance towards exports.

The comments [ID:nBOE002098] came after the latest quarterly Inflation Report showed UK inflation will be below target in two years time if interest rates rise gradually from the middle of next year as financial markets expect.

However overall the Monetary Policy Committee saw broadly balanced risks of inflation being above or below their 2 percent target by late 2011, suggesting little immediate need for more quantitative easing. [ID:nBOE002097]

Sterling fell to a session low of $1.6646 against the dollar GBP=D4 after King's comments, a fall of around half a percent on the day. It had initially risen to a session high of $1.6799 from $1.6748 just after the release of the inflation forecasts.

The euro rose to a session high of 90.31 pence EURGBP=D4, up 0.8 percent on the day, from 89.67 before the release.

The December gilt future FLGZ9 hit a session low of 116.64 immediately after the forecasts, but recovered swiftly to stand at 116.91 at 1036 GMT, down 33 ticks on day, having stood at 116.75 beforehand.

Short sterling futures <0#FSS:> rallied to stand as much as five ticks higher across the strip, having been between one and four ticks lower beforehand.

Bunds were little moved after the report, falling 4 ticks to mark fresh session low of 121.24 before quickly recovering to 121.33 by 1035 GMT.

Britain's FTSE 100 .FTSE remained up 1 percent at 5281.48, showing little immediate reaction to the Bank of England's latest Inflation Report.

(Reporting by Jessica Mortimer)