Sterling rises 1 pct vs dollar after disappointing US jobs data

(Recasts after jobs data, adds fresh quotes)

LONDON, June 3 (Reuters) - Sterling rallied against the dollar on Friday after a disappointing U.S (Other OTC: UBGXF - news) . jobs report sent the greenback sharply lower, helping the pound almost erase losses incurred earlier this week on worries about Britain's future in the European Union.

The dollar index fell 1.4 percent to the lowest level in more than two weeks after the U.S. jobs report cast fresh doubts on whether the Federal Reserve would raise rates soon.

U.S. employers added only 38,000 jobs in May, the lowest number in more than five years, with economists expecting payrolls to rise by 164,000 in May. Wage growth also remained subdued.

Sterling jumped 1 percent to $1.4582, up from $1.4432 before the jobs numbers were released. For the week sterling was down just 0.3 percent, having at one point been on track for its worst performance since March.

"Coupled with subdued wage growth the data throws a large spanner in all the works of (Fed chair) Janet Yellen and other Fed members in attempting to adjust market expectations to a faster rate hiking cycle," said Tom Floyd, Senior Sales Trader at Foenix Partners.

Earlier, sterling had shrugged off better-than-expected UK services data, with the focus firmly on Britain's referendum on the EU. Markit (NasdaqGS: MRKT - news) 's services activity index rose to 53.5 in May from 52.3 in April. That was stronger than the median forecast of 52.5 in a Reuters poll of economists but still one of the weakest readings for the sector in three years.

Markit added Britain's economy looks set to grow by 0.2 percent in the second quarter, stronger than the outlook a month ago but still a slowdown from growth of 0.4 percent in the first three months of 2016.

WEAKER OUTLOOK

Sterling has been weighed down since late last year by worries over the June 23 referendum on EU membership. Britain's hefty current account deficit - 7 percent of output in the last quarter of 2015 - makes the economy, and the currency, vulnerable to any pull-back in investment flows.

"We think the longer term trend is likely to be for a weaker sterling whatever happens on the referendum," said John Redwood, global investment strategist at Charles Stanley (LSE: CAY.L - news) , an independent stock broker.

"Businesses probably would welcome a modest further decline in the currency, which is still well above the levels it traded at against the euro and the yen in 2011-12."

Traders said the currency be hostage to opinion polls before the June 23 vote and would witness more volatility.

While a YouGov (LSE: YOU.L - news) poll published on Wednesday showed British voters evenly split between "Remain" and "Leave", two surveys the previous day - one online and one conducted via telephone - showed a move towards leaving the EU.

Betting website Betfair put the chances of a vote to leave at around 29 percent on Friday, up from around a 17 percent chance last week after several polls put the "In" camp ahead.

Reflecting the nervousness, the one-month sterling/dollar implied volatility - a gauge of how sharp swings will be over the June 23 referendum date - traded at 20.1 percent, having risen to 21 percent on Thursday, its highest level since the depths of the global financial crisis in early 2009. (Reporting by Anirban Nag; Editing by Gareth Jones)