Pound pounces on soft euro, keeps dollar at bay

* Sterling claws above $1.23 as dollar rally fades

* Pushes to highest in 10 days vs euro to as high as 86.11p

* Finance minister repeats UK will need to stay competitive

* PM May speaks at Davos, says wants ambitious trade deal

* Graphic: sterling and gilt yields http://bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv (Recasts with rise vs euro, updates throughout)

By Marc Jones

LONDON, Jan 11 (Reuters) - The pound took advantage of a cautious-sounding European Central Bank head Mario Draghi on Thursday to hit a 10-day high against the euro, and stabilised against the dollar after a rollercoaster few days of Brexit-related swings.

There was a noticeable lull after both its biggest daily rise in decades and two of its heaviest slumps in months against the dollar this week, though its 0.6 percent gain on the euro was its second-biggest in over a month.

Draghi knocked the shared currency down as far as 86.11 pence, saying the ECB saw no sign of a "convincing" upward trend in inflation. The recent rises in headline numbers had stirred talk of the ECB culling its stimulus further this year.

"The news is about the euro and Draghi today and the market has sold the euro off a bit," said State Street Global Advisors EMEA head of currency, James Binny, adding concerns about Dutch, French and German elections may also soon be back in play.

"By our measures sterling has been about as undervalued as it has been historically, but it is pretty unusual circumstances," referring to the currency's Brexit worries.

Britain's prime minister and finance minister had been out again, this time amongst the world's economic elite in Davos, banging the drum for "ambitious" trade deals and trying to dissuade bankers threatening to quit London.

May told the BBC late on Thursday she had had "positive" discussions with banks over the situation.

Two of Europe's biggest banks, HSBC and UBS (LSE: 0QNR.L - news) , had warned on Wednesday that they could each move about 1,000 jobs out of London, while Germany's Handelsblatt newspaper reported U.S. investment bank Goldman Sachs (NYSE: GS-PB - news) had similar plans.

Sterling climbed 0.5 percent to $1.2320, having been knocked as low $1.2254 overnight by comments from Federal Reserve head Janet Yellen that U.S. interest rates are likely to continue to gradually climb.

There were more encouraging data from the U.S. to digest, but with Donald Trump set to formally assume the United States Presidency on Friday investors were largely waiting and watching.

"Anyone who thinks sterling is a buy here and thinks the plan May laid out this week (which triggered a 3 percent surge in sterling) will signal the bottom, should look how it traded yesterday through what were quite strong wage numbers," said Nomura FX strategist Jordan Rochester.

With (Other OTC: WWTH - news) the start of Britain's negotiations to leave the European Union due to start by the end of March, the pound is set to remain highly sensitive, Rochester added.

Data earlier showed Britain's housing market had its weakest month in December since just after June's Brexit vote.

A rise in inflation, which has been fuelled by the pound's slump over the last six months, has drawn warnings from the Bank of England in recent weeks. Money markets now see an 80 percent chance that UK interest rates will have gone up by March 2018.

"We have to remain competitive. The best way to do that is to have a comprehensive trading relationship with the European Union, our closest neighbours," Britain's finance minister Philip Hammond told Reuters. (Editing by Jeremy Gaunt)