Pound hits 2-year low vs dollar

LONDON (Reuters) - The pound sank to a two-year low against the dollar on Tuesday after a surprisingly weak reading of German business confidence bolstered the view that Europe, including the UK, is increasingly in deep economic trouble.

Sterling's slide against the greenback, which hit its highest level of the year against a basket of currencies, pushed the trade-weighted pound to its lowest since October 1996.

These moves earlier in the European session, enough to mostly shrug off a later dollar lurch lower as oil rebounded $5, were triggered by the slump in the Ifo index of German business confidence to a three-year low.

Figures also out on Tuesday showed that German consumer confidence hit a five-year low, adding weight to the view that Germany and the euro zone may be edging closer to recession.

As the euro zone is the UK's largest trading partner and export market, this is potentially bad news for sterling and an imbalanced UK economy over-reliant on consumption and imports.

"The problem for the UK is that weak German growth might, paradoxically, be even worse for sterling than the euro, because of that need to rebalance," said Paul Robinson, chief sterling strategist at Barclays Capital.

"The Ifo led to a selloff in the euro and sterling was dragged down by that. Slowing European growth is not good for the UK economy," Robinson added.

At 1355 GMT sterling was down 0.7 percent on the day against the dollar at $1.8400, having earlier traded as low as $1.8331, a level not seen since July, 2006.

The euro was flat against sterling at 79.65 pence, while the Bank of England's trade-weighted sterling index was fixed at 90.50, a near 12-year low.