Pound falls against euro 

Sterling slid against the euro on Wednesday as worries persisted over the extent of the economic downturn in Britain, but gained against the dollar, which was broadly weaker ahead of key U.S. employment data. Skip related content

Worse-than-expected gross domestic product (GDP) figures on Tuesday showing the economy contracted by 2.4 percent in the first quarter continued to weigh on the pound, which reacted little to an above-forecast factory activity survey.

Sterling turned higher against the dollar as the U.S. currency came under broad pressure, but it remained well below an 8-month high hit early on Tuesday after a surprisingly strong Nationwide housing survey.

Analysts expect trading to be cautious ahead of the non-farm payrolls data, which should provide fresh evidence on the health of the U.S. economy.

"The (PMI) numbers this morning were nothing too exciting for sterling. We're just teetering around and waiting for tomorrow's U.S. payrolls numbers," said James Hughes, markets analyst at CMC Markets.

At 3:33 p.m., the euro had climbed 0.4 percent against sterling at 85.55 pence.

The pound rose 0.5 percent against the dollar to $1.6537, but stayed well below the 8-month high of $1.6745 hit on Tuesday.

Sterling had spent most of the session trading lower against the dollar until figures showing U.S. private employers cut more jobs than forecast pushed the U.S. currency lower.

Sterling's trade-weighted index fell to 83.5, well below the 2009 high of 84.7 hit on Tuesday.

Some analysts believe sterling could be set for some more gains near-term, however, particularly with UK equities performing strongly as the new quarter got underway, with the FTSE 100 index trading up 2 percent .

BNP Paribas currency strategist Ian Stannard said he viewed any falls in sterling against the dollar as a potential near-term buying opportunity.

Further out, however, Stannard noted that sterling could be vulnerable to growing signs that investors may have been over-optimistic in their forecasts for a UK recovery.

Sterling gained around 15 percent against the dollar during the second quarter to post its best quarterly performance since late 1987.

PMI IMPROVES

Manufacturing activity fell at its slowest pace in more than a year in June, with the latest CIPS/Markit manufacturing PMI index rising to 47.0 from 45.4 in May, the highest since May 2008.

Other data showed British service sector output posted its smallest fall in six months during April.

"The latest news on the manufacturing and services sectors confirmed that the economy's rate of contraction eased markedly in the second quarter," Capital Economics analyst Jonathan Loynes said.

He warned, however, that "a return to strong and sustained growth remains a long way off."

Data released Tuesday showed GDP fell by 2.4 percent in the first quarter, a sharp downward revision from the previous estimate of a 1.9 percent decline and the economy's worst performance in more than 50 years.

Britain also recorded a much bigger-than-expected current account deficit of 8.540 billion pounds in the first quarter.

(Additional reporting by Jessica Mortimer; Editing by Victoria Main)