UK data lifts sterling towards 5-year trade-weighted high

* UK construction data lifts sterling

* SONIA curve pricing in greater chances of rate tightening

* Sterling index firm near 5-year highs

By Anirban Nag

LONDON, Dec 3 (Reuters) - Sterling rose towards a five-year high against a trade-weighted basket of currencies on Tuesday after forecast-beating UK data fanned optimism about a sustained economic recovery.

The pound approached Monday's two-year high against the dollar and hit a five-year high versus the yen. It also rose against the euro, with the single currency falling back towards recent 11-month lows as the yield gap between 10-year gilts and Bunds edged out towards their highest in eight years.

The trade-weighted index was at 85.0, having hit 85.1 on Monday, its highest since November 2008, according to Reuters data.

The Markit/CIPS construction PMI rose to 62.6 in November from 59.4 in October, beating expectations of a slight fall to 59. It came a day after a survey showed Britain's manufacturing sector also grew much faster than expected.

The slew of strong data drove more speculators and investors to add to bets in favour of the pound.

"The markets are pricing in a much stronger performance in the UK," said Geoffrey Yu, currency analyst at UBS (Xetra: UB0BL6 - news) . "We are happy to see euro/sterling lower and sterling/yen higher. But we will be a bit more cautious about driving sterling/dollar much higher."

The pound rose to $1.6417 after the data from $1.6393 beforehand, up 0.3 percent on the day. It peaked at $1.6443 on Monday.

The euro fell 0.1 percent to 82.705 pence from 82.78 beforehand, not far from an 11-month low of 82.53 struck on Monday. Sterling rose 0.1 percent to 168.42 yen having earlier hit a fresh five-year high of 169.13 yen.

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Sterling has gained 11 percent against the dollar since it struck a three-year low of $1.4814 on July 9 as signs of a resurgent UK economy heightened expectations the Bank of England would tighten policy much earlier than it has flagged.

In forward guidance unveiled in August, the BoE (Shenzhen: 000725.SZ - news) said it would keep rates low until the jobless rate fell to 7 percent. It expected that to happen in late 2016 and while of late, it has acknowledged that the jobless rate could fall below 7 percent earlier, it still intends to keep policy ultra-loose.

Nevertheless, the overnight sterling interbank average rates - the very short-term interest rates that form the basis of lending costs to the wider economy - were pricing in a slightly higher chance of a move in 18 months' time and a greater risk of tightening in two years' time.

The two-year SONIA rate was at 0.59875 percent, up from 0.58625 percent on Monday and 0.56625 on Thursday.

"In the UK underlying hard data has corroborated PMI strength and we think the pound's gains are on a strong footing," BNP Paribas (Milan: BNP.MI - news) said in a note. "We continue holding a short euro/sterling recommendation from 83.80, but have opted to trail the stop to entry while continuing to target a move down to 81.00."