Pound hits 1-month low vs dollar, euro

Sterling tumbled to one-month lows against the dollar and euro on Friday as concerns about Dubai delaying repayment on debt heightened risk aversion, pushing stock prices lower.

Market moves were also exaggerated as U.S. markets were closed for Thanksgiving Day holiday. At 9:01 a.m., sterling was down 0.8 percent at $1.6363 after falling to $1.6272, the lowest since November 3

The euro rose to 91.34 pence, its highest since October 27.

The pound also hit a one-month low against a basket of currencies at 79.5 in early London trade.

"The dollar strengthened in thin holiday trade amid a heightened state of risk aversion, as fears intensified over the growing possibility of sovereign defaults, and knock on effects in the banking system" said UBS analysts in a report.

London's FTSE index opened sharply lower, falling 1.6 percent. It was last down 0.5 percent at 5169.09.

Against a broadly firmer Japanese yen, sterling fell a 7-month low of 139.33 yen before recovering above 141 yen. But it was still down 1.2 percent on the day.

The pound will also struggle on concerns about the economy. Treasury sources told Reuters Chancellor Alistair Darling will downgrade the 2009 economic outlook when he presents his pre-budget report next month.

An unexpectedly rapid fall in output in the first quarter of the year meant that the economy would probably shrink by around 4.75 percent, instead of the 3.5 percent decline pencilled in at the time the budget was made, the sources said. 

But Darling will still point to growth resuming at the turn of the year as he predicted in April.

The UK economy shrank a revised 0.3 percent in the three months to September, data showed this week.

Bank of England policymakers struck a cautiously upbeat tone. Deputy Governor Charles Bean told the Newcastle Journal the British economy could return to growth in the fourth quarter of this year although any recovery will be slow and protracted.

Bank Monetary Policy Committee member Adam Posen told the Lincolnshire Echo that Britain has been through the worst of the recession but there is "still a lot of work to do" in the recovery.