FOREX-Sterling lifted by data, Aussie dips on China jitters

* Sterling boosted by a pick up in UK inflation

* U.S (Other OTC: UBGXF - news) . data mixed, dollar gains on euro, steady vs yen

* Kiwi inspired by rebound in dairy prices

* Aussie on the defensive after big drop in Chinese stocks

By Ian Chua

SYDNEY, Aug 19 (Reuters) - Sterling held onto broad gains early on Wednesday, having posted its best performance against the euro in over a month after a pick up in UK inflation kept prospects of a Bank of England rate hike in play.

The pound reached a seven-week high of $1.5717, before stepping back to $1.5661. It (Other OTC: ITGL - news) rallied 1 percent against the euro, which slid to a 1-1/2 week low of 70.24 pence . On a trade weighted basis, sterling scaled a 7-1/2 year peak.

British consumer prices rose in July and core inflation hit a five-month high, prompting investors to bet on the BOE moving slightly faster than previously expected once it starts raising interest rates.

"Further upside surprises in core inflation prints (in particular services inflation) are likely to make the hawkish members more comfortable in pulling the trigger for voting for a hike," Credit Suisse (Other OTC: CDSSF - news) analysts wrote in a note to clients.

In contrast, U.S. data was mixed with a rise in housing starts offset by a 16.3 percent drop in building permits.

Still, the dollar edged up against the euro, which eased to a one-week low around $1.1016. That helped lift the dollar index to a one-week high of 97.071.

The greenback, however, was little changed on the yen at 124.365. It has been stuck in a slim 124.055-124.630 in the past few days.

Dollar bulls are now waiting for U.S. consumer inflation data and minutes of the Federal Reserve's July policy review due later in the day.

"Another uptick in the U.S. Consumer Price Index may spark a sell-off in EUR/USD as market participants ramp up bets for a Fed rate hike at the September 17 interest rate decision," said David Song, currency analyst at DailyFX.

"However, the renewed decline in oil prices may drag on the CPI (Other OTC: CPICQ - news) , and a dismal print may undermine the Fed's ability to achieve the 2 percent target for price growth amid the disinflation environment across the major industrialized economies."

Also in demand was the New Zealand dollar, which saw some relief buying after global dairy prices rebounded from a 12-1/2 year low in a closely watched auction.

The kiwi briefly popped above 66 U.S. cents, pulling further away from Friday's trough of $0.6513. It has since eased back to $0.6586.

It rose strongly against its Australian peer, which struggled after a sharp selloff in Chinese equities. The Australian dollar is often used as a liquid proxy for China plays.

The Aussie slid as far as NZ$1.1108, extending its fall from Friday's high of NZ$1.1301. Against the greenback, the Aussie traded at $0.7335, down from this week's high near 74 U.S. cents.

There is little in the way of market-moving data out of Asia on Wednesday, leaving the focus squarely on Chinese equities. (Editing by Shri Navaratnam)