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LONDON, Sept 23 (Reuters) - Sterling was steady on the day against the dollar on Tuesday, erasing earlier gains as the U.S. currency enjoyed a boost as U.S. policymakers urged Congress not to delay approval for the planned bailout of the financial system.

In testimony prepared for delivery to the Senate Banking Committee, U.S. Treasury Secretary Henry Paulson said: "We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil".

U.S. Federal Reserve Chairman Ben Bernanke also urged immediate action and said markets are under "extraordinary stress". See [ID:nLN479495].

The news helped the dollar and brought the pound off session highs of $1.8633.

"The dollar did get a little bit of support from the release of the Paulson and Bernanke testimonies, which were released ahead of time," Simon Derrick, currency analyst at the Bank of New York Mellon said.

At 1455 GMT, the UK currency was steady at $1.8550. Still, the pound hovered near a one-month high of $1.8643 hit on Monday, as investors awaited more details on the U.S. bailout plan, and speculated how effective it would be in rescuing the U.S. banking sector.

Analysts also pointed out that a recovery in oil prices in the past week from a seven-month low reminded market participants of lingering inflation risks, which may make it difficult for the Bank of England to cut interest rates in the coming months.

The euro was down 0.2 percent at 79.33 pence.

Although market players widely acknowledge the urgent need for the U.S. legislation to be passed, there are still major concerns about the massive cost of the $700 billion package. There are also worries that political wrangling over the costly package will drag on into next week.

"The broader issue with the bailout is the substantial impact it will have on the federal deficit," the Bank of New York Mellon's Derrick said.

Meanwhile, broader concerns over the UK economy remain, which analysts say may keep sterling weak.

Data from the British Bankers' Association showed UK mortgage approvals slumped to a record low in August as the housing market continues to suffer the effects of the credit crunch.

The news caused shares in HBOS Plc to fall by over 10 percent as analysts said the slump in mortgage lending is raising concerns that a takeover by Lloyds TSB will not solve its funding problem. See [ID:nLN289289].

In an otherwise quiet week for UK data, the next release of note will be the latest retail sales survey from the Confederation of British Industry on Wednesday.

(Reporting by Jessica Mortimer; editing by Stephen Nisbet) Keywords: MARKETS STERLING/CLOSE

tf.TFN-Europe_newsdesk@thomsonreuters.com

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