UK economy unexpectedly picks up speed but Brexit effect felt

* Q4 GDP +0.5 pct qq vs Q3 +0.4 pct, fastest pace of 2017

* YY (Xetra: A1J6W3 - news) growth of +1.5 pct weakest since early 2013

* ONS says big picture remains one of slower, uneven growth

* Some services sectors, manufacturing grow strongly

* Consumer-facing sectors see slower growth, construction

shrinks

* Sterling rises against U.S. dollar and euro

(Adds reaction)

By William Schomberg and Andy Bruce

LONDON, Jan 26 (Reuters) - Britain's economy unexpectedly

picked up speed in the last three months of 2017, according to

data which showed that the prospect of Brexit was still weighing

on the economy, but not as heavily as once feared by investors.

Gross domestic product grew at its fastest pace of 2017,

rising by 0.5 percent from the third quarter and beating the

median forecast in a Reuters poll of economists that growth

would remain at 0.4 percent.

But the Office for National Statistics said the big picture

was one of a slower and more uneven expansion in the world's

sixth-biggest economy as it approaches its departure from the

European Union in March next year.

In 2017 as a whole, growth was 1.8 percent compared with 1.9

percent in 2016, the slowest since 2012. For comparison, the

International Monetary Fund expects growth of 2.4 percent in the

euro zone last year.

Investors took the data as a sign that the Bank of England

might move more quickly towards only its second interest rate

hike in more than a decade.

Sterling added to its recent strong rise against the U.S.

dollar and climbed against the euro.

The Bank of England said last month it expected the economy

might have slowed slightly in late 2017.

"If the UK economy does indeed struggle to move up a gear

over coming months, the Bank will likely have to tread carefully

when deciding whether to raise rates again this year," James

Smith, an economist with ING, said.

"We don't expect any change in policy from the BoE (Shenzhen: 000725.SZ - news) in

February, but a rate hike at the May meeting is an increasingly

close call."

The BoE's rate-setters are due to announce their next

decision on borrowing costs on Feb. 8.

They raised rates for the first time since 2007 in November.

Most economists have said they expect the next rate hike in late

2018 but some think it could come as soon as May.

Britain's economy grew more weakly than other big rich

nations for much of last year as the impact of the 2016 Brexit

vote pushed up inflation and many businesses turned cautious

ahead of Brexit.

However, Britain has been helped by the recovery in the

world economy last year which is expected to carry on in 2018.

Finance minister Philip Hammond described the figures as

excellence, underscoring the resilience of the economy.

BoE Governor Mark Carney said on Friday Britain could start

to grow more quickly later this year, if there is clarity about

its future relationship with the EU.

CONSUMERS SQUEEZED

While recruitment agencies, letting agents and office

management firms helped boost growth, companies which relied on

spending by consumers had a much slower fourth quarter.

Manufacturers, who have prospered from demand spurred by the

recovery in the global economy, also grew strongly.

Separate data published on Friday showed personal

insolvencies hit a three-year high, reflecting the financial

strain on many households.

Given the strength of global growth, Britain's would have

grown by about 2.5 percent in 2017 were it not for the Brexit

vote, Kallum Pickering, an economist with Berenberg, said.

Compared with the same period in 2016, growth between

October and December slowed to 1.5 percent, its weakest pace

since the first quarter of 2013 and down from growth of 1.7

percent in the third quarter.

The Reuters poll had pointed to growth of 1.4 percent.

Friday's data showed Britain's dominant services sector grew

by 0.6 percent in the fourth quarter, gaining pace after growth

of 0.4 percent in the third quarter, the ONS said.

In November alone, services output growth was the strongest

since August 2016, jumping by 0.4 percent from October. The ONS

said it was expecting no monthly growth in services in December

given the scale of November's increase.

Industrial output slowed to show growth of 0.6 percent from

1.3 percent in the third quarter after the Forties oil pipeline,

Britain's biggest, was closed for more than two weeks in

December after the discovery of a crack.

Britain's construction sector shrank by 1.0 percent, its

worst quarterly performance since the third quarter of 2012.

(Writing by William Schomberg; Editing by Janet Lawrence)