Sterling falls, gilts gain after UK services PMI

LONDON, July 3 (Reuters) - Sterling fell to a fresh three-week low versus the euro on Thursday and gilts extended gains after UK services PMI came in weaker than expected adding to the gloom on the British economy.

Britain's dominant services sector shrank for the second consecutive month in June, at its sharpest rate since October 2001 to 47.1 from 49.8.

"It supports our view that policy rates aren't going to go up although markets are pricing in rate hikes -- that is extrememly unlikely now with the economy slowing at such a rapid speed," said Amit Kara, UK economist at UBS.

By 0836 GMT the pound was at $1.9862 from $1.9882 just before the data <GBP=>. The euro rose as high as 79.96 pence, its highest since June 9, from 79.85 <EURGBP=>.

UK gilt futures and short sterling extended gains after the data. (Reporting by London Markets Team)