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LONDON Sept 3 (Reuters) - Sterling fell to fresh lows on Wednesday but later rebounded after UK services sector data lifted some of the gloom surrounding the economy and prompted traders to trim positions ahead of Thursday's interest rate decision.

The currency fell for the eighth straight day to a 12-year low against a Bank of England trade-weighted index of currencies and again hit its lowest level against the dollar since April 2006.

Data showing an unexpected improvement in UK services sector activity, however, gave market players an excuse to buy the currency back at relatively cheap levels, even though the figures showed the sector is still contracting.

"It does seem as though the sell-off in sterling was a little bit overdone. The PMI was below 50 but was a little better than expected, and the market is thinking more cautiously about where it is pushing the currency," said Stuart Bennett, economist at Calyon.

The UK service sector purchasing managers' index (PMI) bounced back to 49.2 in August from 47.4 in July. Analysts had expected a decline to 47.0. For more, see [ID:nL3406248].

At 1435 GMT sterling was down only 0.1 percent on the day against the dollar at $1.7797 <GBP=>, having earlier traded at its lowest since April 2006 at $1.7669. The pound was flirting with $2 barely a month ago.

Against a basket of currencies of UK trading partners, the pound was fixed at 88.3 <=GBP>. Earlier in the day it was as low as 88.2, its weakest since October 1996 and the eighth straight day it has been fixed at a 12-year low.

Sterling held steady against the euro, with the euro at 81.39 pence <EURGBP=>, still within sight of its record high of 81.62 pence struck on Tuesday.

Concerns over the bleak outlook for the UK economy have not gone away, however, with the recent downbeat assessments of the UK economy from finance minister Alistair Darling and the OECD continuing to weigh on investors' minds.

Darling said in a newspaper interview that economic conditions were their most challenging in 60 years. And on Tuesday, the Organisation for Economic Co-operation and Development said the UK is the only Group of Seven industrialised nations likely to slip into recession this year.

The Bank of England's Monetary Policy Committee meets to set interest rates on Thursday. It is almost certain to leave them at 5 percent, which means no accompanying statement will be released.

Markets aren't fully ruling out the possibility of a cut on Thursday but the PMI data suggests any policy easing won't be forthcoming for at least another month.

"Any doubts about the Bank of England's intentions at tomorrow's policy meeting should have been removed by the latest service sector PMI," said George Buckley at Deutsche Bank.

Financial markets expect the BoE to cut rates a quarter percentage point by November and again to 4.50 percent by February. Keywords: MARKETS STERLING CLOSE

tf.TFN-Europe_newsdesk@thomson.com

tc

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