* UK avoids recession as economy grows by 0.3 percent in Q1
* Beats forecasts for 0.1 pct growth
* Pound hits 2-month high versus dollar, 3-week peak vs euro
* Trade-weighted sterling rises to 2-1/2 month high
By Jessica Mortimer
LONDON, April 25 (Reuters) - Sterling rose to a two-month high against the dollar on Thursday after data revealed the UK economy grew by more than expected in the first quarter of the year, comfortably avoiding another recession.
The pound also rose to a three-week high against the euro and hit its strongest in 2-1/2 months against a trade-weighted basket of currencies.
Britain's gross domestic product rose 0.3 percent in the first quarter of the year, well above forecasts for a 0.1 percent rise, as the economy bounced back after shrinking by 0.3 percent in the final three months of 2012.
Another quarter of contraction would have put Britain into its third recession in five years - the so-called triple-dip.
The pound jumped by more than a cent after the data to hit $1.5448, its highest level since Feb. 20, and posted a gain of more than 1 percent on the day.
The data eased worries about UK economic fragility and lessened the chances that the Bank of England will increase asset purchases under its quantitative easing programme.
"The fact that the economy was essentially flat over the last two quarters is prompting a sigh of relief for the market. We've seen a move through the highs in mid-April above $1.54 and this will spur some near-term support for sterling," said Simon Smith, chief economist at FXPro.
"The market had got worried about the prospect of 'triple dip' headlines which could have sealed the fate of more QE."
QE is usually negative for sterling as it increases the supply of the currency.
Sterling extended gains after breaking above chart resistance at $1.5423, marking the 38.2 percent retracement of its fall from a peak of $1.6380 in January to the March low of $1.4832.
More gains could see sterling target $1.5550, a high hit on Feb. 15, then the 100-day moving average at $1.5585 and the 50 percent retracement of the above move at $1.5606.
The euro fell around 0.7 percent to hit 84.535 pence, its lowest since April 4. More losses would target the 100-day moving average at 84.46 pence and the April 1 low of 84.115 pence.
The data showed the economy was helped by strong services growth and a rebound in North Sea oil and gas output. Annual GDP growth was 0.6 percent, its strongest since the end of 2011.
"Compared to the euro zone's five straight quarters of declining output, the UK's economy - and sterling's prospects - are both looking up again," said Chris Redfern, senior dealer at Moneycorp.
Against a trade-weighted basket of currencies, the pound hit its highest since early February, with its index reaching 80.8, Bank of England data showed.
PROSPECT OF M&A BOOST
Traders said the pound was also benefiting from the prospect of sterling-positive flows if U.S. company Verizon Communications Inc bids to take full control of Verizon Wireless by buying the stake of UK joint venture partner Vodafone Group Plc.
People familiar with the matter said on Wednesday that Verizon (NYSE: VZ - news) had hired advisers to prepare a possible $100 billion cash and stock bid. (Editing by Catherine Evans)
