Sterling steady as coalition plans awaited

* Market focuses on how Coalition will work together

* Swift action on UK deficit required

* Bank of England inflation report due at 0930 GMT

By Neal Armstrong

LONDON, May 12 (Reuters) - Sterling steadied on Wednesday as investors waited to see how the newly formed UK coalition government would work together, particularly to tackle the country's troublesome financial deficit.

The pound had staged a relief rally on Tuesday after Conservative Party leader David Cameron took over as British prime minister and said he planned to form a coalition government with the smaller Liberal Democratic party.

Cameron's move into No. 10 Downing Street removed some of the uncertainty that drove sterling to a 13-month low against the dollar last week after an inconclusive election gave no party an absolute majority in parliament. [ID:nLDE6492UW]

"The Conservative/Liberal Democrat coalition was the best solution for the markets, but of course there is still some uncertainty as to how the two parties will work together," said Lauren Rosborough, senior currency strategist at Westpac.

At 0725 GMT, sterling was flat versus the dollar GBP=D4 at $1.4950. It had risen above $1.5000 on Tuesday as the market digested news that the then PM Gordon Brown had tendered his resignation, paving the way for Cameron to enter Downing Street.

"Yesterday's relief rally has petered out but I do expect the new government to take quick action on spending cuts which should keep the ratings agencies on side," said Kenneth Broux, market economist at Lloyds Banking Group.

The dire state of the UK's public finances has been a cause of concern for ratings agencies, with investors sensitive to the potential for a downgrade to the UK's sovereign rating which would hamper efforts to pay off the deficit.

The euro was broadly unchanged versus sterling EURGBP=D4 at 84.60 pence.

UK DATA, INFLATION REPORT

Focus was switching to UK employment data due at 0830 GMT, following Tuesday's strong industrial production figures, showing the fastest monthly gain since July 2002.

A Reuters poll looks for the claimant count to fall by 20,000 in April, with the unemployment rate expected to remain at 8 percent.

The Bank of England's quarterly inflation report is then due at 0930 GMT.

"We expect a possible upward revision to the Bank's near- term inflation profile but with CPI seen settling close to target two years hence under market rate assumptions - the overall message being one of cautious neutrality," RBC analysts said in a note.

(Editing by Susan Fenton)