UPDATE 1-Pakistani political woes mount, but rupee rebounds

By Sahar Ahmed

KARACHI, May 12 (Reuters) - The Pakistani rupee was steady on Monday, holding on to gains made in thin trade on Saturday and trading 3.5 percent above Friday's all-time closing low, dealers said.

Fears that Pakistan's 6-week-old coalition government could splinter following the failure of negotiations between party leaders in London at the weekend, has eroded confidence.

The currency has been undermined by a mounting oil import bill and inflation running at a 13-year high.

On Monday the rupee was quoted at 67.00/50 per dollar, up from 69.40/60 on Friday when its 3.5 percent plunge brought the currency's losses to 12.7 percent so far this year.

Although Friday's decline has been reversed, it was uncertain whether the recovery would last as few deals had been done on Saturday or Monday morning, and banks reluctance to trade was evident by the wide bid/ask spreads being quoted.

"Sentiment had improved after the central bank's statement on Friday," said a dealer in Karachi.

To calm nerves, State Bank of Pakistan said on Friday evening that foreign currency inflows of up to $3.5 billion were expected in the short to medium term, which would help stabilise the rupee.

Governor Shamshad Akhtar said in the statement that there was no crisis and the rupee's weakness did not reflect macro-economic fundamentals.