Sterling hits 3-wk low as Britain's services sector growth lags U.S.

(updates prices after U.S. data, comments)

LONDON, March 4 (Reuters) - Sterling fell to a three-week low against the dollar on Wednesday after growth in Britain's dominant services sector eased in February lagging the United States where growth picked up modestly last month.

The UK Markit/CIPS UK Services Purchasing Managers' Index (PMI) slipped more than expected to 56.7, from 57.2 in January, and well below a Reuters forecast of 57.5. For the United States, the index rose to 57.1, its highest level since October. The reading was roughly even with the preliminary read of 57.0 and up from the 54.2 recorded in January.

Sterling fell to $1.5270, it lowest level since Feb. 12 and down from around $1.5357 before the UK data, leaving it 0.6 percent lower on the day. It was trading firmer against the euro at 72.50 pence per euro, not far from a 7-year high of 72.37 struck earlier in the day.

"The pound has slipped after activity in such a key growth contributor fell below expectations," said Jameel Ahmad, chief market analyst at FXTM. "This somewhat erases optimism that the UK economy was looking at scoring two hat-tricks of solid monthly PMIs in a row (construction, manufacturing and services)."

Data earlier this week showed growth in the construction sector reached a four-month high while manufacturing growth was at a seven-month peak in February. Growth in all three sectors beat expectations in January, reinforcing the view that the Bank of England could raise rates sooner than many anticipate.

The euro was broadly weaker as traders geared up for the European Central Bank's asset buying programme, which is due to begin this month. The weaker currency helped the euro zone's own PMI reading to a seven-month high in February, but investors were wary of the euro compared with the pound.

Sterling has been amongst the strongest performing G10 developed world currencies over the past month, fuelled by expectations rates will rise early next year.

But an election in May, whose result is uncertain, is prompting investors, including hedge funds, to stay cautious.

"Hedge funds are weary of the pound ahead of the general elections in the UK on May 7," a note from Societe Generale (Paris: FR0000130809 - news) 's asset allocation team said. "The net short sterling positions were only slightly reduced in view of the recent strengthening of sterling but dangers lurk."

Investors are concerned by the prospect of heavier spending and taxes and more regulation of the financial sector under a possible centre-left Labour government.

They also worry that Britain could leave the European Union if the ruling Conservatives win. Under pressure from the anti-EU UK Independence Party, the Conservatives have promised a referendum on EU membership within two years if they win. (Reporting by Anirban Nag, editing by Nigel Stephenson/Jeremy Gaunt)