Sterling sinks to new lows after big GDP drop

* Sterling sinks on bigger-than-expected drop in UK GDP

* Pound falls to new 23-year low vs dlr at $1.3500 GBP=D4

* Pound hits record low against yen

* UK Q4 GDP falls 1.5 pct; confirms Britain in recession

LONDON, Jan 23 (Reuters) - Sterling fell broadly on Friday, sinking to a fresh 23-year low against the dollar, as data showed the UK economy shrank at its fastest pace since 1980 and confirmed Britain had fallen into recession for the first time in nearly 20 years.

UK gross domestic product shrank 1.5 percent in the three months to December, more than forecasts for a 1.2 percent decline. It was the largest quarterly drop since the second quarter in 1980.

The data, coming after a 0.6 percent contraction in the third quarter, confirmed that Britain had fallen into recession for the first time since 1991.

“The worst fears in the market were confirmed with a fall of 1.5 percent in Q4,” said Brian Hilliard, economist at Societe Generale. “2009 is going to be a pretty awful year.”

By 1014 GMT, sterling was down 2.2 percent at $1.3547 GBP=D4, after falling to $1.3500, the lowest since September 1985.

Sterling has already dropped some eight percent against the dollar since the start of the week on concerns about the banking system and the government’s ability to service its ballooning public debt.

“The pound has been the whipping boy in the currency market,” said Christian Lawrence, currency strategist at RBC Capital.

The pound fell to a record low against the yen at 119.25 yen GBPJPY=R. On a trade weighted basis, the pound was at 73.6, close to a historic low of 73.3 =GBP

Sterling also fell 0.8 percent against the euro to 94.50 pence, but the euro was also suffering on concerns over its banking sector and economy.

The dire GDP reading spurred speculation that key interest rates, now at 1.5 percent, will fall toward zero and Bank of England Governor Mervyn King has indicated the central bank was considering more unconventional measures to supply liquidity and bolster growth. That is expected to weigh on sterling.

“This report confirms that the economy is in deep recession and adds to the case for further aggressive BoE policy easing,” said Nick Kounis, economist at Fortis.

“The probability that the central bank will need to turn to a quantitative easing policy is rising,” he added.

Separate data showed UK retail sales rose 1.6 percent in December from the previous month. Difficulties led to the data being compiled on a non-seasonally adjusted basis.

Meanwhile, reaction was limited to news reports that British Conservative Party leader David Cameron said Britain was “running the risk” of being forced to go to the International Monetary Fund for funds to prop up its economy.

“It seems to be more political posturing than any real threat, at least in the near term,” one London-based trader said.

British Prime Minister Gordon Brown described the comments as “irresponsible behaviour” on the part of opposition politicians.

Brown told BBC radio the government’s policy response would not be influenced by criticism from speculators.

“If you think that we are going to build our policy around the comments of a few speculators who want to make money out of Britain, then you are very, very wrong indeed,” he said. [nLAL002136] (Reporting by Tamawa Desai; Editing by Victoria Main)