* Sterling rises vs dollar and euro, helped by UK data
* UK public finance better than expected, shows surplus
* Sterling recovers from 2-1/2 year low of $1.5130
* Analysts say sterling still vulnerable to easing prospects
By Philip Baillie
LONDON, Feb 21 (Reuters) - Sterling gained on Thursday after improved UK public finance data helped it to rebound from steep falls, but it remained vulnerable as the Bank of England looked more likely to ease monetary policy.
Britain’s public finances showed a large surplus in January, which buoyed the currency, although challenges for the government to meet its full-year budget goals remained.
Sterling was up 0.1 percent against the dollar at $1.5251, well above a 2-1/2 year low of $1.5130 hit earlier in the day.
Traders said hedge funds were among the main buyers of the pound as they took profit on its recent steep drop.
On Wednesday the pound fell 1.25 percent, its biggest daily decline in 14 months, after BoE minutes showed outgoing Governor Mervyn King and two others voted to relaunch asset purchases under its quantitative easing (QE) programme.
“The barrier for further easing remains low and that has been what has been driving sterling lower. It has moved low very quickly but in our opinion ... there is still room for sterling to weaken,” said Raghav Subbarao, currency analyst at Barclays.
“I do think the downtrend will remain in place. It is hard to see what could change it in the next few months,” he said, though he added it was unlikely to depreciate at the same pace.
Bank of England minutes contrasted with those of the U.S. Federal Reserve showing some policymakers thought bond-buying should be stopped or slowed, a view which helped to push sterling even lower against the dollar.
The pound rebounded more strongly against the euro, which fell on sluggish euro zone economic data and concerns about the outcome of the elections on Sunday and Monday in Italy.
The euro was down 0.6 percent on the day at 86.55 pence, a session low, pulling away from a near 16-month high of 87.645 pence on Wednesday.
Barclays’ Subbarao said the euro could weaken further from current levels, adding that after recent broad gains it could be vulnerable to negative news about Italy’s election.
The British currency’s outlook has been bleak due to fears of a downgrade of the UK’s triple-A credit rating and deteriorating economic conditions.
Bank of England policymakers considered expanding the range of assets they purchased under QE - typically negative for a currency because pumping more money into the economy increases the supply - and cutting interest rates.
They have also indicated they are prepared to allow inflation to remain above its 2 percent target beyond the two-year horizon outlined in its mandate.
With the Bank of England hinting at the possibility of ramping up its quantitative easing programme, while some in the Fed voiced concerns about keeping the stimulus taps running for much longer, the pound’s weakness is likely to persist.
“The intensity of the sterling move lower in the last 24 hours has been a toxic mix of the BoE voting to do a little bit more quantitative easing and the Fed saying they might end their (bond purchases),” said Kathleen Brooks, research director at Forex.com.
“The Fed minutes suggested that their balance sheet could shrink faster than the BoE‘s.”