Pound hits 8 1/2-month low vs dollar

Worries about how euro zone states including Greece and Portugal will service their debts have prompted investors to cut their exposure to risky assets, including those denominated in sterling, which has been battered in recent weeks.

Taking losses into a fourth successive day, the pound fell to $1.5535 in early London trade, its weakest since late May 2009.

Analysts said sterling may come under more selling pressure as broad concerns about sovereign debt highlight Britain's own grim fiscal position and crank up risk aversion.

"We could see $1.55 if the selling continues. That's going to depend on the general attitude on risk," said Geraldine Concagh, economist at AIB Group Treasury in Dublin.

"The sovereign issue is going to be the key thing this week."

By 8:35 a.m., sterling traded 0.2 percent lower on the day at $1.5620.

The pound trimmed some losses, but stayed under selling pressure after it fell more than 2 percent against the dollar last week, its worst weekly performance since late September 2009.

The pound suffered across the board, pushing the euro up 0.4 percent to 87.86 pence, its strongest in two weeks.

Sterling was slightly lower on the day against the yen at 139.55 yen, staying close to a 10-month low of 138.20 yen hit late last week.

Negative sterling sentiment was highlighted by the latest data from the Commodity Futures Trading Commission, which showed currency speculators increased their bets that sterling will depreciate, taking net sterling short positions to 33,968 last week from 27,153 the week before.

While investors keep an eye on developments in the euro zone this week, attention will also be on the Bank of England's quarterly Inflation Report on Wednesday, when the central bank is expected to cut its 2010 growth forecast while increasing its consumer price outlook.

The report follows the central bank's decision last week not to extend its 200 billion pound quantitative easing plan. Investors were also awaiting comments from BoE Governor Mervyn King for any hints on the outlook for monetary policy.

(Reporting by Naomi Tajitsu, editing by Nigel Stephenson)