Sterling falls vs euro on QE risk; UK GDP awaited

* Stg hits nr 7-mth low vs euro, 5-mth trade-weighted low

* Possible fresh monetary stimulus continues to weigh

* Weak Q3 GDP data on Tues may increase chances of more QE

* Pound up vs broadly weak dollar; hits 20-month low vs yen

By Jessica Mortimer

LONDON, Oct 25 (Reuters) - Sterling fell to its lowest in nearly seven months against the euro on Monday, weighed down by the possibility the Bank of England may loosen monetary policy and that GDP data on Tuesday could point to a stuttering UK recovery.

The pound rose against a broadly weaker dollar as a Group of 20 agreement to shun competitive currency devaluations was viewed as a green light to resume dollar-selling on expectations the Federal Reserve will ease monetary policy next week.

But the prospect that the BoE may follow in the Fed's footsteps by opting for a fresh bout of quantitative easing (QE) left sterling underperforming currencies other than the dollar, pushing it to a five-month low versus a currency basket.

Investors were concerned weak UK third quarter gross domestic product data on Tuesday could increase the chances of more QE in the UK. Economists expect Britain's economy grew just 0.4 percent between July and September, a third of the 1.2 percent recorded the previous quarter. ECONGB [ID:nLDE69O0UG]

"The damage done to the dollar as the market moves to discount Fed QE is clearly spilling over into sterling as the risks of more QE in the UK are clearly increasing," said Adam Cole, global head of currency strategy at RBC.

By 1435 GMT, the euro was up 0.2 percent at 89.04 pence EURGBP=D4, having earlier risen as high as 89.41 pence, its strongest since the end of March.

Traders said the euro could face tough resistance before it breaches the psychologically key 90.00 pence mark. Beyond that it could target the 2010 high of 91.50 pence.

Falls against the euro helped push trade-weighted sterling down to 78.3 =GBP, its weakest since late May and leaving it set to target the May low of 77.8.

Sterling also fell to a 20-month low against the yen of 126.47 yen GBPJPY=R and dropped to its lowest in more than two decades against an outperforming Australian dollar GBPAUD=R at A$1.5768.

DATA AHEAD

Against the U.S. dollar, the pound was up 0.2 percent at $1.5720 GBP=D4, with support seen above its 50-day moving average, currently at $1.5650.

"The market is gunning for the dollar going into the Fed meeting, but it's not all good for sterling and the easiest way to express a bearish view on sterling is against the euro," said Paul Mackel, currency strategist at HSBC.

"The GDP data is the main focus for sterling this week and if it disappoints the market will factor in a higher probability of more QE".

Sterling has underperformed most currencies other than the dollar since BoE minutes last week showed one policymaker, Adam Posen, voted for an extension of quantitative easing.

Market participants were also wary that harsh public spending cuts announced by the UK finance minister last week may further hamper an already fragile economic recovery, further increasing the chances of the BoE opting for more QE.

Speaking on Monday, BoE Deputy Governor Paul Tucker said the British economy was not yet ready for tighter monetary policy and predicted a "bumpy and uneven" recovery. [ID:nLDE69O1HE]

RBC'S Cole said if the GDP data come in as forecast on Tuesday it would raise concerns about the sustainability of the UK recovery.

"At this stage of the recovery we should be looking at above-trend, not below-trend, growth".

Data on Monday exacerbated concerns about a softening UK housing market, showing UK mortgage approvals at an 18-month low [ID:nLAH006802] (Editing by Stephen Nisbet)