Sterling slides to new 31-year low on Brexit worries

(Updates with fresh lows, M&G (Shanghai: 603899.SS - news) property fund freeze)

By Jemima Kelly and Anirban Nag

LONDON, July 5 (Reuters) - Sterling slumped 2 percent to hit a 31-year low against the dollar and a 2-1/2-year trough against the euro on Tuesday as investors worried about the economic and financial fallout of Britain's vote to leave the European Union.

The pound, which has borne the brunt of market concern about the economic impact of the vote, fell to $1.3022, its lowest since September 1985. That left it 13 percent below its levels before the June 23 referendum.

Sterling also fell against the euro to 85.48 pence per euro, its lowest level since late 2013. And against the Bank of England's trade-weighted basket of currencies, sterling fell to its weakest in more than three years.

The pound's losses accelerated after Aviva Investors, the fund arm of insurer Aviva (Other OTC: AIVAF - news) , suspended its UK Property Trust with immediate effect. M&G, the fund management arm of insurer Prudential (HKSE: 2378.HK - news) , also suspended trading in its 4.4 billion pound UK property portfolio and feeder fund.

On Monday, Standard Life Investments, the fund arm of insurer Standard Life (LSE: SL.L - news) , suspended its 2.9 billion pound UK real estate fund.

These suspensions raised concerns about whether foreign investors would pull out of UK's commercial property sector in large numbers, putting the currency under more pressure.

"The last time we saw this kind of action was in the financial crisis," said Mark Priest, head of index and equity market making at ETX Capital.

"Fears about the investment industry are leaching into the forex markets today, with sterling seeing heavy selling again after a few days of relative calm."

Sterling briefly trimmed losses after Bank of England Governor Mark Carney, speaking after publication of the Bank's semi-annual Financial Stability Report, said the fall in the currency should help ease the balance of payments shortfall.

"One of the most striking things for us is the fact that he (Carney) spoke quite openly about the need for sterling to adjust to act as a stabiliser, and that its weakness was necessary ... so that was actually a positive spin," said ING currency strategist Viraj Patel.

BOE CONCERNED

The BoE also expressed concern about a fall in investor demand for British assets -- which could make it harder for the country to finance its large current account deficit -- as well as trouble in commercial real estate making it harder for businesses to use their property as collateral to obtain loans.

"Given that the UK's current account deficit was running at a clip of nearly 7 percent of GDP over the last few months, anything that slows capital inflows undermines the currency," said John Hardy, head of currency strategy at Saxo Bank.

Earlier, a survey of Britain's services sector showed uncertainty in the run-up to the referendum had slowed growth last month to a three-year low, and sent business expectations to their weakest since 2012.

But RBC Capital Markets currency strategist Adam Cole said the survey had virtually no impact on the currency, and investors would only be able to see the real effect on business confidence in July.

Analysts said with economy likely to slip into a recession, a rate cut is likely in coming months. Investors are pricing in a 25 basis point rate cut in August. (Editing by Jeremy Gaunt and Janet Lawrence)