Sterling hits 10-mth low vs dollar, selling snowballs

* Sterling falls to 10-mth low vs dlr, hit by UK poll woes * Selling accelerates after Prudential/AIG announcement

* Cable selling heats up after technical levels broken

LONDON, March 1 (Reuters) -Sterling sank to a 10-month low against the dollar on Monday and looked set to post its biggest one-day drop in more than a year after polls showed a growing chance that an upcoming general election may result in a hung parliament.

Having broken through the key $1.50 level, the pound at one point dropped roughly 3 percent on the day, with traders citing selling by a UK bank after AIG said it would sell its Asian life insurance business to UK insurer Prudential Plc.

Market participants also used weaker-than-expected data on UK mortgage approvals as another reason to knock the pound to a three-month low against the euro, leaving it at an 11-month trough versus a currency basket.

Analysts said negative sterling sentiment snowballed in London trade, leading to frantic selling in the UK currency after it broke through key technical levels against the dollar.

“Sentiment on sterling is very bad at the moment. Given half a chance, people will just sell it,” said Paul Robinson, chief sterling strategist at Barclays Capital in London.

“Election uncertainty is going to persist, I don’t think the MPC is suddenly going to change its tune (on the possibility of resuming quantitative easing) ... I can’t see anything changing sterling’s prospects in the short run.”

By 1229 GMT, the pound GBP=D4 traded 2.4 percent lower on the day at $1.4885. Having tumbled as low as $1.4781, the pound looked to be heading for its biggest one-day percentage loss since February 2009.

“At these levels, sterling’s clearly oversold,” said Geoffrey Yu, currency strategist at UBS in London. “I’d say $1.45 is the limit (to short-term sterling weakness).”

Technical analysts said selling picked up after the pound made a decisive break of key support around $1.5270 late last week, around the 50 percent Fibonacci retracement of 2009 rally.

In a matter of seconds, the pound dropped roughly 2 cents, taking it below its 61.8 percent retracement level around $1.4855, which some analysts said may open the door to more losses.

The euro EURGBP=D4 rallied around 2 percent to 91.50 pence, its highest since early December, and was poised to clock its best daily percentage gain since late October 2009.

Analysts said they expected sterling to stay under selling pressure against the euro, while acknowledging that gains in the euro may be limited by the single currency’s weakness against the dollar due to ongoing concerns about Greece’s debt problems.

Broad losses pushed sterling =GBP down to 76.5 against a currency basket, its lowest since October last year.

Sterling GBPJPY=R hit a one-year low against the yen of 132.07 yen, while it plumbed its weakest in 25 years against the high-yielding Australian dollar GBPAUD=.


Analysts said the biggest drag on sterling was a Sunday Times/YouGov poll showing the ruling Labour party may win more seats in parliament even if the opposition Conservatives win more of the popular vote. [ID:nUKPOLLS10]

Expectations are high that a general election due by mid-year may result in a hung parliament, which would make it difficult for the ruling party to pass unpopular plans to cut the deficit, which would be negative for sterling.

AIG said it would sell AIA to Prudential for $35.5 billion dollars [ID:nWNAB3170]. The announcement sparked sterling selling on speculation that the UK insurer may have sell pounds for dollars as part of the sale.

Traders also dumped the pound after data showed a dip in UK mortgage approvals in January, even as mortgage lending and consumer credit rose. [ID:nLDE62010I]

Market participants also brushed off a reading of UK manufacturing PMI which showed the manufacturing sector expanded faster than expected last month. [ID:nLDE6200ZB]

Sterling continued its slide despite an upward revision to UK economic growth last week as concerns simmer about a tepid economic recovery, high public debt and political uncertainty.

Sentiment has also deteriorated in the last week after the Bank of England said it stood ready to return to its asset-buying scheme if economic conditions warranted.

This has prompted speculators to dump the pound, with positioning figures late last week showing another hefty rise in bets that sterling will depreciate. [IMM/FX]

For a graphic on sterling positioning, click below:

here (Reporting by Naomi Tajitsu; editing by Stephen Nisbet)