Sterling index at 8-month high, boosted by UK jobs data

* Sterling hits 7-month high vs dollar, euro

* UK jobless rate drops to 7.7 percent

* Sterling/yen at four-year highs

By Anirban Nag

LONDON, Sept 11 (Reuters) - Sterling's trade-weighted index rose to an eight-month high on Wednesday as the UK jobless rate dropped, supporting bets that interest rates could be tightened by the end of next year.

Data showed the jobless rate - a key policy metric for the Bank of England - dipped to 7.7 percent in the three months ending in July from 7.8 percent.

That beat expectations of a steady reading and was the lowest rate since September-November (Xetra: A0Z24E - news) 2012.

The number of people claiming jobless benefit fell by 32,600 in August, beating forecasts of a drop of 22,000 from July.

All of this lifted sterling to $1.5827, its highest since Feb. 8, a 7-1/2 month high against the euro at 83.83 pence per euro and a four-year high against the yen . The trade-weighted sterling index rose to an eight-month high of 82.6, Bank of England data showed.

Sterling was last trading at $1.5780, 0.3 percent higher.

"The UK data has been consistently good and sterling has been rallying because of that," said Daragh Maher, currency strategist at HSBC (LSE: HSBA.L - news) . "We expect it to rise more against the euro than (against) the dollar."

The 10-year gilt yield was holding above 3 percent, hovering near two-year highs. Its spread over U.S. Treasury yields was at its highest since end-February while the gap over comparable euro zone bonds was at its widest in three years.

That supported a view that, based on rate differentials, the pound was likely to outperform against the euro.

HIKE IN LATE 2014?

The improved UK labour market is consistent with recent strong data showing an upturn in the manufacturing and services sectors. House prices and consumer confidence are also rising.

That has led investors to price in chances that UK interest rates will rise well before the Bank of England has flagged, possibly as soon as late next year.

Sterling overnight interbank average rates (SONIA) were pricing in a chance of the first move in 15 months.

The 15-month SONIA rate was at 0.50 percent while the 18-month rate was at 0.5350 percent, up from 0.48625 percent and 0.51375 percent respectively on Sept. 5

Central bank chief Mark Carney has pledged to keep policy accommodative and rates anchored until the jobless rate falls to 7 percent, which he has said he does not expect to happen until towards the end of 2016.

Carney is scheduled to make an appearance before a parliamentary committee on Thursday. He is likely to be questioned on his policy of forward guidance and what he might do if the market continues to pay little heed to it.

Reflecting some of the nervousness, one-week sterling/dollar implied volatilities, a gauge of how sharp swings in a currency can be, rose to 6.7 percent from 6 on Tuesday.

Analysts said that even though Carney is likely to reiterate his dovish pledge, the slew of good economic data was prompting investors to look past that message.

"The UK has all been about confidence and there is a lot of pent-up demand," said Bill Street, head of investments EMEA at State Street. "The UK growth story is looking good to us."