Sterling slides after shock contraction in UK GDP

* Sterling slides more than 1 pct vs dlr, euro on GDP shock

* UK Q3 GDP down 0.4 pct q/q vs forecasts for 0.2 pct rise

* Data reopen prospect of BoE expanding QE in November

(updates with fresh quotes, prices)

By Jessica Mortimer

LONDON, Oct 23 (Reuters) - Sterling fell by more than 1 percent against the dollar and euro on Friday after data showed the UK economy contracted again in the third quarter, surprising most in the market who had expected growth to return.

British gross domestic product fell by 0.4 percent between July and September, way below analysts' expectations of a 0.2 percent rise, making the current recession the longest on record with six successive quarters of contraction. [ID:nONS004554]

The shocking numbers were enough to drive sterling to the day's lows against a range of currencies. It had earlier hit a six-week high against the dollar, buoyed by expectations of firm GDP data.

"The consensus for the UK to return to growth had been building up based on analysis of UK services PMI data, which had been showing consistent expansion," said Naeem Wahid, currency strategist at Bank of Scotland Treasury in London.

"Hence it has shocked everyone by suggesting the UK economy is still in recession. Sterling has come off sharply and I think there is still more downside to come," he said.

Sterling slid to a session low of $1.6393 against the dollar GBP=D4, nearly three cents below the earlier six-week high of $1.6694.

The pound also fell sharply EURGBP=D4 against the euro. The single currency hit a session high of 91.79 pence to post its biggest gain in a month, having earlier fallen close to the 90.00 pence mark.

At 1024 GMT, sterling was down 1.2 percent at $1.6423, while the euro was up 1.3 percent at 91.57 pence.

These large falls pushed sterling's trade-weighted index down a whole point to 79.6 =GBP from 80.6 earlier.

MAJOR DOUBT OVER QE PAUSE

Bank of Scotland Treasury's Wahid said he expects sterling to fall towards $1.63 against the dollar, citing $1.6241 as the next big support.

Below this would be sterling's weakest level in eight days, when it began to climb on growing speculation the Bank of England would not extend quantitative easing -- under which the bank buys assets to inject cash into the economy -- next month.

But analysts said Friday's GDP disappointment would undermine that view and reopen the prospect of the BoE increasing asset purchases from their current level.

"The further contraction in GDP in the third quarter puts serious pressure on the Bank of England to extend its quantitative easing programme at the November MPC meeting," said Howard Archer, economist at Global Insight.

"It also reinforces belief that interest rates will stay down at 0.50 percent until at least late-2010," he said.

Investors have read recent comments by UK policymakers as giving differing signals on whether asset purchases will be extended.

Monetary Policy Committee member Spencer Dale weighed in with a newspaper interview on Friday.

"A challenge for the future will be the pace at which we withdraw the exceptional stimulus of the 175 billion pounds of quantitative easing (QE) the Bank of England has provided," he told Aberdeen's Press and Journal. [ID:nLN213697]

He did not discuss increasing asset purchases.

In a radio interview broadcast on Friday, the newest MPC recruit, Adam Posen, said the central bank would have to reverse the stimulus in the medium term, but that policymakers were being cautious for now.

On Thursday, BoE Deputy Governor Paul Tucker said quantitative easing could be extended if necessary.

(Reporting by Jessica Mortimer, editing by Nigel Stephenson)