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Poor PMI hurts sterling as dollar struggles

(Adds quotes, detail)

By Patrick Graham

LONDON, May 3 (Reuters) - Sterling retreated from a four-month high to the dollar and hit an 11-day low against the euro on Tuesday after a poor survey of manufacturing sector managers underlined the economic risks from a referendum on EU membership in June.

Sterling rose as much as 0.7 percent against a broadly weaker dollar in early trading, hitting its highest since the start of January and extending gains into a fourth straight week.

But the slump in the PMI survey below 50 points - which points to a contraction of the sector - knocked it back by a third of a cent. Against the euro, sterling fell 0.3 percent on the day to 78.79 pence, its lowest since April 22.

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"Even (Taiwan OTC: 6436.TWO - news) before the numbers, the euro had been rallying against sterling for almost three hours," said Kamal Sharma, a strategist with Bank of America Merrill Lynch in London.

"What we're seeing again is a broader dollar story playing out but we still believe sterling will come under pressure going into the referendum."

The pound has recovered steadily since reaching long-term lows around $1.38 in late February after the date of the Brexit vote was announced.

It (Other OTC: ITGL - news) has surged in the past two weeks as bookmakers' odds shifted back against the "Out" camp in a vote seen by financial investors as a large risk to the British and European economies.

By 0926 GMT, sterling was still up 0.2 percent $1.4702, but some distance from its earlier high of $1.4770.

"Sterling has bounced too much against the dollar for me," Societe Generale (Swiss: 519928.SW - news) analyst Kit Juckes said in a note. "I like euro longs against the pound here. But our chosen expression of GBP weakness remains against the Norwegian crown."

British government bond prices rose after the PMI survey, which added to signs that it may be a long time before the UK economy generates the sort of growth and price pressure that would cause the Bank of England to raise interest rates.

June futures increased by about 20 ticks and the yield on 10-year gilts fell back to its level of last Thursday.

"Risk sentiment in general has worsened in the last few days, but in addition the manufacturing PMI was much worse than expected and it shows that the headwinds to the UK economy are not only coming from overseas," Nick Stamenkovic, a bond strategist at RIA Capital Markets, said.

"The referendum does seem to be weighing." (Reporting by Patrick Graham; editing by John Stonestreet)