Sterling hits 3-wk high vs dollar on risk demand, UK data

* Sterling hits 3-wk high of $1.6587, risk appetite up * Pound rallies on surprisingly strong UK retail sales

* Investors await UK GDP data, by-election results

LONDON, July 23 (Reuters) - Sterling hit a three-week high against the dollar on Thursday, lifted by gains in global equity markets and stronger-than-expected UK retail data that raised hopes the British economy was over the worst of the recession.

Sterling's upside momentum began early on Thursday, when British retail data showed sales volumes rose 1.2 percent in June on the month, over three times analysts' forecasts [ID:nLN86107].

Better-than-expected results from Credit Suisse (CSGN.VX) and other firms reassured investors that the world economy was on the mend, boosting share indexes in Europe and pushing up currencies perceived to be higher risk.

Higher risk-demand pressured the dollar broadly lower. Wall Street shares .DJI and oil prices CLc1 each gained more than 2 percent.

"At the moment, whichever way stocks have moved has impacted the dollar, and this has had a knock-on effect on sterling," CMC Markets analyst James Hughes said.

Stronger retail sales data also boosted hopes that the first estimate for Britain's second-quarter gross domestic product, due on Friday, would show the economy contracting at a much slower rate, analysts said.