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LONDON (Reuters) - Sterling fell to its lowest in more than three weeks against the dollar on Friday after weak UK services data and as the dollar rose broadly after some U.S. policymakers called for monetary stimulus to be slowed.
Britain's dominant service sector shrank for the first time in two years in December, a purchasing managers' survey showed, suggesting the economy may have contracted in the fourth quarter of 2012 following a third quarter rebound.
The pound was last down 0.4 percent on the day at $1.6039, having earlier dropped as low as $1.6010, its weakest since December 10. This took it well below a peak of $1.6380 hit on Wednesday.
It edged off its lows, however, after U.S. jobs data tempered the likelihood that the Federal Reserve will moderate its ultra-loose monetary policy anytime soon and caused the dollar to pare gains. It showed the pace of hiring by U.S. employers eased in December while unemployment held steady at 7.8 percent.
"The main driving move (of sterling) has been from dollar strength after the FOMC minutes overnight, then a slight reversal following better-than-expected non-farm payrolls data," said Christian Lawrence, currency analyst at Rabobank.
But he said the earlier weak UK services data had prevented a strong rebound in the pound following the U.S. jobs data.
Prior to the jobs figures the dollar had gained broadly after minutes of the Fed's December policy meeting showed some policymakers thought it would be appropriate to "slow or stop asset purchases well before the end of 2013".
"The UK data this morning was pretty weak, the services PMI got a lot of attention because it was back in contractionary territory," Lawrence said.
Further losses could see sterling drop towards the psychologically key $1.60 level and the December 10 low of $1.5999, then towards the mid-November low of $1.5828.
Rabobank's Lawrence said if sterling did break below $1.60, it could see a sharp decline towards $1.58 in the short term.
The pound also lost ground against the euro, which rose 0.4 percent to 81.32 pence, pulling away from a three-week low of 80.86 pence reached on Thursday.
A Reuters poll showed the pound may struggle against the dollar next year, but analysts were more optimistic about sterling than the euro and the yen.
Markit's UK services PMI index fell to 48.9 in December, its lowest since April 2009, from 50.2 in November, confounding analysts' expectations of a small rise. It followed a weak UK construction PMI, although the manufacturing PMI beat forecasts.
Markit said the PMI figures suggested Britain's economy shrank 0.2 percent in the final quarter of 2012, a slightly bigger drop than most other private sector forecasts.
A fresh fall in gross domestic product could raise the chances of the Bank of England restarting its stimulus programme and may spark worries about the possibility of ratings agencies downgrading the UK's prized top-notch rating.
"This is not good for sterling, I think it will see a steady decline," one London-based trader said.
With concerns growing about a deteriorating UK economy just as investors turn more positive on the U.S. dollar, analysts said sterling could be set for more falls in the coming weeks.
"The Fed minutes surprised and forced the market to adjust its expectations for how long it will maintain the current very loose monetary policy," said BTMU currency economist Lee Hardman.
UK lending data on Friday was more positive, however, showing UK mortgage approvals hit their highest since January last year.
Additional reporting by Jessica Mortimer; Editing by Catherine Evans