Gilts retreat in quiet trade, UK inflation data eyed

* Gilts underperform Bunds by small margin

* Focus on Tuesday's UK inflation data

* Trade subdued by U.S. market holiday

By Christina Fincher

LONDON, Feb 15 (Reuters) - Firmer equities, worries about
upcoming UK inflation data and a persistent focus on Britain's
budget deficit pushed gilts lower on Monday, with shorter-dated
issues bearing the brunt of the losses.

A U.S. public holiday and a dearth of major data made for
subdued trade. But things will liven up later in the week when
several key UK economic indicators are released.

UK inflation data on Tuesday will be followed by labour
market data and minutes to the Bank of England's February
meeting on Wednesday, public finance figures on Thursday and
retail sales data on Friday.

"There's a growing sense of discomfort with gilts and a
feeling that yields will go higher," said Mohit Kumar, gilts
strategist at Deutsche Bank.

"We're seeing a mix of worries about UK sovereign risk and
worries about tomorrow's inflation number. Everyone wants to be
short."

Tuesday's figures are expected to show inflation leapt to
3.5 percent in January from 2.9 percent in December, an outcome
which would force Bank of England Governor Mervyn King to write
an open letter explaining why inflation has risen so far above
its 2 percent target. [ID:nLDE61E1P4]

The March gilt future FLGH0 settled 22 ticks lower at
114.41, underperforming the equivalent Bund future FGBLc1
which shed 14 ticks.

Investor concern about Greece's fiscal situation and the
pace of British deficit reduction remained to the fore.

Finance minister Alistair Darling said on Monday he would
cut the deficit faster if growth was better than expected, but
that next month's Budget would be focused on supporting the
economy. [ID:nLDE61E0GI]

Europe's FTSEurofirst 300 index of leading shares .FTEU3
ended 0.4 percent higher, but with U.S. markets closed for a
public holiday traders were reluctant to take big positions in
gilts.

"With the U.S. closed, you can't read too much into today's
price action," said Moyeen Islam, gilts strategist at Barclays
Capital. "In the next three days we have some really big
releases for the gilt market."

Ten-year gilt yields GB10YT=RR rose 3 basis points to 4.07
percent. The yield spread over 10-year Bunds EU10YT=RR widened
to 85.4 bps from 84.2 basis points but remained short of
Friday's two-and-a-half year intra-day record of 89.2 basis
points.

Supply this week is limited to a mini-tender of 2047
inflation-linked gilts, details of which will be released on
Tuesday.

* March gilt FLGH0 114.41 (-0.22)

* March short sterling FSSH0 99.33 (UNCH)

* 10-year yield 4.07 percent (+3 bps)

--------------------- KEY MARKET DATA---------------------------
Long Gilt futures <0#FLG:> Gilt benchmark chain <0#GBBMK=>
Short Stg futures <0#FSS:> Cash market quotes <GB/GILT1>
Deposit rates DM= Sterling cross rates GBPX1=
UK debt speedguide <GB/DEBT> Econ. indicator polls<ECI/GB>
--------------------KEY MARKET REPORTS--------------------------
Gilts [GB/] Sterling [GBP/]
Euro Debt [GVD/EUR] Dollar [USD/]
U.S. Treasuries [US/] Debt reports [DBT]
-------------------- GILT STRIPS DATA --------------------------
Gilt strips data <GB/STRIPS1> All gilt strips <0#GBSTRIP=>
Gilt strips IO <0#GBSTRIPIO=> Gilt strips PO <0#GBSTRIPPO=>
A list of all the strippable British gilts <0#GBSTRIPTSY=>
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