Bets for volatile British pound soar as Scotland votes

(Adds quote, details)

By Anirban Nag

LONDON, Sept 18 (Reuters) - Financial investors stepped up hedging against sharp fluctuations in the value of Britain's pound over the next 24 hours as Scots voted in an independence referendum that polls suggest is too close to call.

The overnight sterling/dollar implied volatility rose to a high of 34.75 percent, almost 10 times levels seen a month ago, having closed on Wednesday at around 12.75 percent. The overnight options will expire on Friday, when results for the Scotland vote will be announced.

Thursday's vote will close at 10 p.m. (2100 GMT) and the first trends are likely to come out a few hours after that.

Currency dealers said they are bracing for choppy trading as the first regions likely to report results could show a tendency to lean towards independence. That could put sterling under pressure.

Larger regions, with the highest percentage of the vote, are not expected to report until later, and the final result may not be clear until 0400-0500 GMT on Friday. Most polls show the "No" campaign with a slender lead in the knife-edge vote.

"All this will see plenty of volatility and hence the bid for overnight options," said a London based trader.

The pound traded slightly higher at $1.6310, well above a 10-month low of $1.6051 struck last week. It has bounced from those lows after most polls showed those intending to vote to stay in the union were slightly ahead.

Sterling has lost 1.8 percent against the dollar this month, weighed by concern a Scottish vote for independence would undermine investment and growth and prompt the Bank of England to push back an expected rise in interest rates.

Traders said while there are few signs of panic amongst investors, there was a great degree of caution. A "Yes" vote could engender significant weakness in the pound on the prospect of long-drawn-out negotiations over North Sea oil revenues, possible new trade barriers and, crucially, uncertainty about which currency the Scots would use.

All this is likely to keep investors wary of UK assets in the near term while lower growth expectations could prompt rating agencies to downgrade Britain's debt.

"There is a unsettling degree of uncertainty on the quality of the polls surrounding this event and that a "Yes" vote shock, while unlikely, is possible and could mean discontinuous moves in the market and volatility of several multiples of the norm," said John Hardy, head of currency strategy at Saxo Bank.

SWINGING

Until a turnaround in mid-July, sterling had been one of the best performers among major currencies in the past year, propelled by expectations robust economic growth would prompt the BoE to raise interest rates by early next year.

Data on Thursday showed retail sales volumes rose 0.4 percent on the month, in line with forecasts and the strongest growth since April, after flatlining in July. On the year, retail sales were up 3.9 percent last month, also a four-month high, but slightly lower than expected.

Attention, though, was on the Scottish vote with many currency traders likely to work through the night. Credit Suisse (NYSE: CS - news) is keeping its specialist sterling traders overnight in their London office for the referendum.

Reflecting the uncertainty, euro/sterling overnight implied volatility also shot up to trade over 33 percent, from around 9 percent on Wednesday.

Sterling gained against the euro, with the euro down 0.15 percent at 78.93 pence per euro. The euro was also hurt after the European Central Bank handed out a below-forecast 82.6 billion euros in its first offering of four-year loans to banks. Traders said the lower take-up would keep pressure on the ECB to opt for quantitative easing.

Risk reversals, which gauge demand for options on a currency rising or falling, showed their biggest bias for sterling weakness against the dollar in four years. The risk reversals also showed their highest bias for the pound's weakness against the euro in six years. (Reporting by Anirban Nag; Editing by Catherine Evans/Ruth Pitchford)