British pound sinks as its trade deficit increases

* Euro hits 3-week high vs pound at 88.14 pence EURGBP=D4
* UK trade gap highest since Jan 2009
* UK retail sales drop on Jan, house prices rise
* Poll suggests hung parliament after election

LONDON, Feb 9 (Reuters) - Sterling fell to a three-week low against the euro and sagged near multi-month lows against the dollar on Tuesday as data showed the UK trade deficit unexpectedly widened to its highest in nearly a year.

Britain's goods trade gap widened to 7.278 billion pounds from 6.798 billion in December, its highest level since January 2009. Economists had forecast a deficit of 6.63 billion pounds. [ID:nONS004778]

That put pressure on the pound as it suggested the economy may not have made much progress although Britain emerged from recession in the final three months of last year.

"December's UK trade figures suggest that the external sector is still feeling little benefit from either the lower pound or tentative global recovery," said Vicky Redwood, economist at Capital Economics.

The euro hit a three-week high of 88.14 pence EURGBP=D4 after the trade data, up 0.7 percent on the day. At 0952 GMT, it was at 88.09 pence.

The euro gained broadly as investors covered short positions on speculation about a rescue plan for Greece after news European Central Bank President Jean-Claude Trichet would return early from a trip to Australia to attend a European Council summit. [ID:nSGE61801C]

Mixed economic data, concern about sovereign debt risk and political uncertainty all weighed on the pound, which hit a 8-1/2 month low against the dollar on Monday.

Earlier data showed British retail sales recorded their worst performance for the month of January in at least 15 years, even as separate figures showed house prices extended their recent rise. [ID:nLDE617292]

The British Retail Consortium said the value of like-for-like sales last month was 0.7 percent lower than a year ago. That followed a 4.2 percent annual rise in December.

Sterling was down 0.1 percent at $1.5587 GBP=D4. It fell to $1.5535 on Monday, its lowest since May last year.

Data from the Commodity Futures Trading Commission last Friday showed currency speculators had increased their net short positions to 33,968 in the week ended Feb. 2 from 27,153 the week before. [ID:nN05162244]


HUNG PARLIAMENT

Concerns over Britain's mounting debt weighed on the pound, as the euro zone faced a crisis of confidence over some of its debt-laden smaller countries such as Greece and Portugal.

Finance minister Alistair Darling will propose a final budget next month ahead of a general election to be held by mid-year.

Speculation the vote could produce a hung parliament, in which no party has overall control, also kept the pound on the back foot.

A Populus poll for the Times newspaper published on Tuesday found support for Prime Minister Gordon Brown's Labour Party up two points from last month at 30 percent, while the centre-right opposition Conservatives were down one point at 40 percent.

The projections, in line with other recent polls, suggest the Conservatives would be three seats short of an overall parliamentary majority if repeated in an election due by June, the paper said.