WRAPUP 2-Interest rate cut bets knock pound to 13-year low

* Trade-weighted sterling hits lowest in nearly 13 years

* UK service sector PMI falls to record low of 40.1 in Nov

* Money markets fully pricing in 100 bp UK rate cut Thurs

(Updates prices, adds quotes)

By Jessica Mortimer and Christina Fincher

LONDON, Dec 3 (Reuters) - Sterling hit its lowest level in almost 13 years on Wednesday as another batch of dire economic data convinced investors that the Bank of England would slash interest rates to prevent a recession turning into a slump.

The floundering pound fell to 80.4 on a trade-weighted basis GBP=, its weakest since January 1996, after data showed Britain's dominant services sector contracted last month at its fastest pace since records began more than a decade ago.

Sterling has now fallen 17.5 percent on the trade-weighted index since the start of the year.

Wednesday's figures on the service sector followed surveys earlier this week showing the country's manufacturing and construction sectors are also in sharp decline.

Economists said the pace of deterioration in Britain's economy and a sharp drop in price pressures gave the central bank ample room to follow up last month's stunning 150 basis point cut with another sharp reduction -- probably of 100 basis points on Thursday.

Such a move would take UK interest rates to 2 percent, their lowest level since 1951. Interest rates have never fallen below 2 percent since the Bank of England was created in 1694.

"A 100 basis point cut is now priced in across all markets," Deutsche Bank economist George Buckley said.

"There is a risk that they will do more and it would be very disappointing if they did less," he said, adding: "All these PMI figures are consistent with a sizeable drop in GDP."

Interbank markets suggest banks remain extremely reluctant to lend, despite a taxpayer-backed recapitalisation package.

By 1537 GMT, the pound had fallen 0.8 percent on the day to $1.4783 GBP=, while the euro strengthened to a session high of 86.07 pence -- closing in on last month's record high of 86.62 pence EURGBP=.

"The pound has been performing relatively poorly compared with other currencies, and the key to that is the Bank of England policy outlook," Standard Chartered currency strategist Rob Minikin said.

Markets believe that they will act aggressively and cut rates by 100 basis points on Thursday and probably take them down further after that," he added.

SHAKY OUTLOOK

Analysts say sterling is particularly vulnerable to deleveraging flows in the market that are boosting the low-yielding yen and weighing on currencies that previously had the attraction of higher yield.

Global recession worries and the prospect of a further round of monetary easing have left investors increasingly risk averse, weighing on riskier currencies such as the pound and sending UK stocks .FTSE down three quarters of a percent.

Along with the BoE, central banks in the euro zone, New Zealand and Sweden are expected to cut rates substantially this week. The Australian central slashed borrowing costs by a full percentage point on Monday.

Evidence on Wednesday of easing UK inflationary pressures suggested the BoE has room for a sharp cut, with the British Retail Consortium reporting a drop in annual shop price inflation to 2.7 percent in November from October's 3.0 percent. [ID:nL3104115].

There was also more bad news overnight as a Nationwide survey showed UK consumer confidence tumbling six points in November to its lowest since the survey began in May 2004 as Britons fretted about impending recession. [ID:nL2557948].

"In short, conditions are dismal and are set to deteriorate further," RBS economist Ross Walker said in a note to clients.

A Reuters poll released on Monday showed 40 out of 62 economists expected UK interest rates to fall by 100 basis points to 2.00 percent on Thursday. (For details please double click on [BOE/INT]) (editing by David Stamp/Victoria Main)