* Pound reaches $1.6506, a 2-1/2-yr high
* Traders say option triggered at $1.65, volumes low
* Sterling down 0.3 pct against euro
By Shadi Bushra
LONDON, Dec 27 (Reuters) - Sterling reached a near two-and-a-half year high against the dollar on Friday on expectations that economic recovery in Britain could prompt the Bank of England to raise rates sooner than previously thought.
Trading was thin as many traders stayed away after a two-day holiday for London markets, with activity likely to remain light until after the New Year.
The pound was up 0.5 percent against the dollar, trading at a high of $1.6491 at 1020 GMT after reaching an intraday peak of $1.6506 in early trading, its highest point since August 2011.
Traders said an option was triggered at $1.65, but warned against reading too much into the fluctuations given the time of year and the holidays.
"I think a lot of this is down to year-end trading and particularly thin markets," said Michael Sneyd, a foreign exchange strategist at BNP Paribas.
Strong British economic figures, including mortgage data released on Tuesday, have supported the pound, triggering fresh speculation of a sooner than expected interest rate hike by the Bank of England to keep the economy from overheating.
The pound is up 1.5 percent in 2013 after a 4.6 percent gain in 2012, and is on track for its first consecutive annual gains since 2006-2007.
However against the euro the pound was weaker, with the single currency up 0.4 percent at trading at 83.69 pence.
The euro gained on Friday as banks adjusted positions ahead of year-end with traders focused on an asset-quality review to be conducted by the European Central Bank.
The euro has risen more than seven percent from a low hit in July, as the euro zone economy came out of a recession triggered by its debt crisis.
The European Central Bank has not been expanding its balance sheet actively unlike its U.S. and Japanese counterpart, giving an additional boost to the euro.