Pound hits 2-1/2-year low vs dollar

The spread of U.S. economic weakness to other countries was reflected in global stock markets. Evaporating risk appetite pushed sterling to a 12-year low against a basket of currencies.

"Markets are just very, very risk averse ... we're seeing liquidation across the board. High-yielding assets are being sold," said Geoffrey Yu, currency strategist at UBS.

"Sterling is considered a risk currency under current circumstances: it's got a slowing economy and a current account deficit ... so trades taken on for yield are being unwound."

The Bank of England left interest rates unchanged at 5 percent on Thursday, but a rapidly deteriorating economic outlook has lent support to arguments for a rate cut, even though inflation pressures persist.

Such a move would decrease sterling's yield advantage over assets denominated in other currencies.

On a trade-weighted basis, the pound extended losses for 10th consecutive day to fall to 87.9, its lowest since October 1996.

Sterling slumped as low as $1.7538 before recovering to $1.7611 by 9:30 a.m., up a touch on the day. Still, the exchange rate has fallen nearly 3 percent this week, a phenomenon that has occurred only three times since 2000.

It continued to suffer against the euro, which rose 0.2 percent to 81.02 pence, staying near a record high of 81.86 pence hit on Thursday.

Risk aversion was stoked by a 0.7 percent slide in European shares , which followed steep losses in Asian and U.S. shock markets.

With few major economic data and events due out during the European session on Friday, investors awaited U.S. payrolls figures due later in the day. Forecasts are for a loss of 75,000 jobs, and market participants say a weak reading may trigger dollar selling.

(Reporting by Naomi Tajitsu, editing by Swaha Pattanaik)