Sterling recovers from UK growth disappointment, hits 7-wk high vs dollar

(updates, adds fresh quote)

By Anirban Nag and Patrick Graham

LONDON, April 28 (Reuters) - Sterling hit seven-week highs against the U.S. dollar on Tuesday, recovering from earlier losses after data showed the UK economy grew slower than expected in the first quarter.

Quarterly gross domestic product growth slowed to 0.3 percent - half that of the last three months of last year and below forecasts of 0.5 percent. On an annual basis, the British economy was growing at a healthy 2.4 percent pace.

Sterling rose 0.6 percent to trade at $1.5338, rebounding from a low of $1.5174 struck immediately after the growth data was released at 0830 GMT. Those losses were temporary as investors cut long dollar positions ahead of a Federal Reserve meeting that could offer clues as to whether bets on rate hikes in the coming months are justified.

Recent U.S. data has been soft, prompting investors to cut favourable bets on the dollar.

"It seems there are a lot of U.S. rate plays going through the CME (Chicago Mercantile Exchange), and I tend to agree that USD strengthening has paused for the time being in currencies," said Peter Jerrom, a derivatives broker with London-based Sigma.

The pound remained in negative territory against a resurgent euro, down 0.2 percent on the day at 71.60 pence.

The bigger impact of the growth figures might be in next week's UK elections. The data undermined a cornerstone of Conservative Prime Minister David Cameron's campaign.

Most polls show the ruling Conservatives and the opposition Labour Party neck and neck, making a "hung parliament" likely, investors say the market impact of the May 7 vote will only be clear once a new coalition is formed.

"We aren't positioned in the UK right now. We are kind of sitting on the fence. Its too close to call, we see no real value in the market right now. Sterling was becoming cheap but that's had a rally, that's no longer an obvious cheap purchase," said Steve Clark, founder of London-based hedge fund firm Omni Partners (Other OTC: PGPHF - news) that manages about $1 billion.

British government bond prices were flat on the day, conceding earlier modest gains after the disappointing growth figures.

Short sterling futures , one gauge of future British interest rates, were mostly unchanged as of 1520 GMT and still pointed to a first Bank of England interest rate hike around the turn of the year. (additional reporting by Nishant Kumar and Andy Bruce; Editing by Jeremy Gaunt)