LONDON (Reuters) - Sterling extended losses on Tuesday after British economic data continued to disappoint, keeping alive the risk of another recession with analysts expecting further weakness in the currency.
The pound was hurt after data earlier in the day showed Britain's Purchasing Managers' Index (PMI) for manufacturing activity rose to 48.3 in March from 47.9, but was still below the 50 mark which separates growth from contraction.
Bank of England data soon afterwards showed mortgage approvals fell for a second month, hinting at weakness in Britain's key housing market.
The pound was down 0.7 percent at $1.5120. Near-term chart support was cited at $1.5112, its February 28 low. Strategists said any gains in sterling would be short-lived as markets remain keen to sell the currency on rebounds.
"Sterling has fallen very sharply, perhaps even more than the data earlier today justifies. Manufacturing PMI wasn't great and this seems to have spooked the markets a bit," said Kathleen Brooks, research director at FOREX.com.
"The more important number is the services PMI and if we see that come in higher than the expected 51.5, we could see a bit of a reversal (in sterling weakness)."
Unlike Britain's factory activity, data due on Thursday is expected to show services were resilient in March, providing some hope that Britain could skirt a triple-dip recession.
Analysts also expect the Bank to hold interest rates steady and refrain from restarting its asset purchase programme when it meets on Thursday and this could support sterling in the near term.
"The Bank has said they are a little concerned with sterling's weakness so it is unlikely they will surprise markets by boosting quantitative easing as it could cause a sharp drop in the pound," Brooks said.
Traders said sterling's losses on Tuesday were accentuated by reported payments made by a British insurer to meet claims related to the 2011 earthquake in Christchurch, New Zealand. Sterling fell to NZ$ 1.7914, its lowest in more than three decades.
The euro was up 0.5 percent against struggling sterling at 84.74 pence, some way off 84.115 pence hit on April 1, which was its lowest since January 24 and could act as near-term chart support, strategists said.
Sterling had gained in recent weeks against the euro as growing concerns about the banking crisis in Cyprus, coupled with the political situation in Italy, drove some foreign investors to discard euro zone assets in favour of sterling.
Data earlier on Tuesday showed manufacturing across Europe's major economies suffered another month of mostly deep decline in March, further undermining the single currency.
Sterling could benefit versus the euro if the European Central Bank, which meets on Thursday, hints at easier policy in the future at ECB chief Mario Draghi's press conference.
Although not the market's central scenario, some strategists spoke of an outside chance of a rate cut by the ECB.
"Where we have a scope for surprise is probably the ECB as there is a chance it might cut rates," said Peter Kinsella, currency strategist at Commerzbank.
"It is not our core view - we think rates will remain on hold. But the risk is there and that could put a little bit of pressure on euro/sterling in the course of the week," he said, adding that the euro could fall to 84.20 pence but was unlikely to grind lower given Britain's bleak economic outlook.