* Pound near lowest level vs dollar since July 2010
* Sterling knocked by weaker-than-expected construction data
* Speculation of further BoE easing mounts
By Nia Williams
LONDON, March 4 (Reuters) - Sterling fell on Monday, nearing a more than 2-1/2 year low against the dollar, after weaker-than-expected construction data reinforced concerns the British economy is sliding into another recession.
The gloomy economic outlook has fuelled speculation the Bank of England may resort to more monetary easing at its policy meeting later this week in a bid to stimulate growth.
The pound fell to a session low of $1.50 after a Purchasing Managers' Index survey showed British construction output last month fell at its fastest pace since October 2009.
It pared losses to last trade close to flat on the day at $1.5039, but held within sight of Friday's trough of $1.4985, which was hit after PMI data showed a shock contraction in Britain's manufacturing sector last month.
It was the first time sterling had fallen below $1.50 since July 2010.
"The more we get numbers like the PMIs the more it feels certain we are going to be talking about a further move in monetary policy," said Simon Derrick, head of currency research at Bank of New York Mellon.
"If they (BoE) fail to move this month the most likely outcome is it will just reinforce the market view it will come next month. I think cable (sterling/dollar) is ultimately heading towards the mid- to low-$1.40s."
Many market players are speculating policymakers will opt to extend their 375 billion pound quantitative easing programme to try and stimulate growth. QE, which involves pumping money into the economy through bond purchases, tends to weigh on a currency by increasing its supply.
SERVICES PMI IN FOCUS
Melinda Burgess, currency strategist at RBS (LSE: RBS.L - news) , said the pound may find temporary support around $1.50, with many traders wary of making aggressive bets before the policy announcement.
In the longer term sterling looking likely to extend losses given the contrast between a gloomy British economic outlook and recent signs of recovery in U.S. manufacturing.
"Sterling is being used as a highly liquid proxy for everything that is wrong with the UK," Burgess said.
The next focus for investors will be PMI data for the dominant services sector on Tuesday.
Morgan Stanley (Xetra: 885836 - news) strategists said even if services PMI data, forecast to be 51.0, is stronger than expected they would look to sell any sterling rallies. The bank put out a trade recommendation to sell the pound at $1.51, with a stop loss order at $1.5230 and a target of $1.47.
The euro gave up brief gains made after the construction PMI data and dipped 0.2 percent on the day to 86.40 pence, retreating from last week's 16-month peak of 88.15 pence.
The single currency's gains against a weak pound have been limited by grim euro zone manufacturing and unemployment data released last week, political stalemate in Italy, and speculation the European Central Bank may cut rates on Thursday.
(Editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)