Pound surges vs euro but capped on Bank rate views

LONDON (Reuters) - Sterling rallied from recent record lows versus a broadly weaker euro on Monday but was pressured against the dollar on expectations the Bank of England will cut interest rates aggressively again later this week.

The euro was on track for its biggest one-day loss against the pound in nine years with a recent drive towards parity failing for now as the single currency dived some two percent against the dollar.

A fall in Britain's construction sector and a retailer's report on Monday after dismal housing and bank lending data on Friday reinforced views the UK economy is headed for a steep downturn and interest rates will continue to be slashed.

Market players are expecting the central bank to ease borrowing costs by at least 50 basis points to a historic low of 1.5 percent from the current 2.0 percent.

"We are still looking for a 50 basis point reduction to 1.5 percent this month. It is possible that the MPC opts for a more aggressive 75 basis point or even 100 basis point move," said Philip Shaw, chief economist at Investec.

The Bank will announce its decision on Thursday after a two-day rate meeting.

By 2:23 p.m., the euro was down 1.9 percent at 93.66 pence after falling to a two-week low of 93.36 pence, according to the Reuters dealing system.

It had hit a record high against sterling of 98.05 pence on December 30. The pound was flat at $1.4517.

Data on Monday showed the Chartered Institute of Purchasing and Supply/Markit construction index fell to 29.3 in December from 31.8 in the previous month. A reading below 50 indicates contraction.