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LONDON, Sept 15 (Reuters) - Sterling hit a two-week high against a tumbling dollar on Monday on concerns about the U.S. financial sector after Lehman Brothers filed for bankruptcy protection and reports that U.S. insurer AIG sought help from the Federal Reserve.

Market players are also wary at the start of an event-heavy week, with futures markets pricing in a high probability of a U.S. interest rate cut on Tuesday.

Worries about contagion in Europe and particularly the UK put a cap on sterling's gains, due to the British economy's hefty exposure to financial services.

The dollar tumbled across the board as Lehman became the latest and the largest casualty of the global credit crisis after announcing it has filed for bankruptcy protection.

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In response, the Fed has said for the first time it will accept stocks in exchange for cash loans.

The news has led to talk that the U.S. Federal Open Market Committee may opt to cut borrowing costs from 2.0 percent when it meets Tuesday.

"This has to increase the likelihood of a Fed rate cut, and uncertainty about what they will do next," said Paul Robinson, chief sterling strategist at Barclays Capital.

The European Central Bank and Bank of England announced fine-tuning operations, signalling they were prepared to open liquidity taps further to ease money market tension [nWLA9550].

At 0851 GMT, the pound was steady at $1.7954 against the dollar, having earlier hit a two-week high of $1.8128. Against a basket of Britain's major trading partners, sterling's trade-weighted index was fixed at a 19-day high of 90.4, coming further off the 12-year low of 87.9 hit earlier in the month.

Against the euro the pound was flat, trading at 79.38 pence.

But sterling remains vulnerable, given the importance of the financial sector to the UK economy.

"The UK's exposure to financial market woes will be exposed and sterling will be vulnerable ... Risk appetite and financial sector developments will be crucial for the currency throughout the week," UBS strategists said in a note to clients.

Investors are nevertheless bracing themselves for a key event week in the UK. Inflation and labour market data, as well as the minutes of the September Bank of England Monetary Policy Committee meeting, will be closely watched.

BoE Governor Mervyn King looks set to write a letter of explanation to UK Chancellor Alistair Darling on Tuesday as UK CPI inflation remains more than one percentage point above the 2 percent target.

Labour market data Wednesday will highlight the risks that the economy is heading for recession, if it is not already in one. Wednesday's Bank of England minutes will be scrutinised for any signs that more of the nine-member Monetary Policy Committee are starting to lean towards cutting interest rates.

(Reporting by Jessica Mortimer; editing by David Stamp) Keywords: MARKETS STERLING/OPEN

tf.TFN-Europe_newsdesk@thomsonreuters.com

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