* Graphic: sterling and gilt yields bit.ly/2dgAXn1
* Graphic: sterling year-to-date tmsnrt.rs/2egbfVh (Adds details, wraps gilts)
By Andy Bruce and Anirban Nag
LONDON, Oct 17 (Reuters) - A sell off in the British government bond market accelerated on Monday amid nerves about political instability, pushing the yield on the 10-year gilt to its highest since the Brexit vote in June and weighing down on the battered pound.
Sterling's near 20 percent sharp drop since the Brexit vote has sent inflation expectations soaring, driving investors to reassess chances of further easing by the Bank of England this year. It also led some analysts to say that foreign investors were demanding an extra premium before buying gilts.
The benchmark 10-year gilt yield was at 1.17 percent , up around 8 basis points on the day, and having risen to 1.20 percent earlier on Monday. It has moved in the same direction of Bunds and U.S. Treasuries in recent days, but the fact that gilt yields have risen at a faster pace than their German and U.S. counterparts reflected investor nervousness.
Despite being only halfway through October, the 10-year gilt yield is on track for one of the biggest monthly increases since the financial crisis, up 42 basis points since the end of September. Most of the increase this month reflected expectations of higher inflation: conventional bond yields rose fast but inflation-protected bonds were little changed.
But in the last few days, inflation-protected bond prices have lost ground too.
"That does hint that there's a bit more of a risk premium being put into gilts overall than there was before," said Jason Simpson, strategist at Societe Generale.
The sell off came on media reports of disagreements between the finance minister and his cabinet colleagues over the terms of Britain's exit from the European Union.
The Daily Telegraph said Philip Hammond could quit his post after he was excluded from government meetings because he criticised the "hard" Brexit stance of Prime Minister Theresa May. Although the Treasury denied that Hammond will quit, it did little to instill confidence in British assets, traders said.
May's spokeswoman told reporters on Monday that the prime minister had every confidence in Hammond, and that she was keen to listen to "differing views" among her top team.
"You've got all this backdrop of "hard Brexit", fiscal easing - a lot of quite negative stories out there for gilts. You couldn't nominate one specific driver," said Simpson.
Gilt yields have increased despite the BoE purchasing bonds worth about 14 billion pounds a month. But because the market had anticipated a further expansion of monetary policy - which now looks more unlikely this year - yields have surged back as these expectations unwound.
Simpson added that money markets now priced in only an around 10 percent chance of an interest rate cut in November.
Inflation figures on Tuesday mark the next major event. Economists expect consumer prices rose by 0.9 percent in the year to September, up from 0.6 percent in August.
Inflation is expected to rise above 2 percent in 2017 because of a sharp fall in the value of the pound. At the same time, the economy is expected to slow as Britain begins the process of leaving the EU and tries to negotiate new trade deals, leaving the economy facing a potentially toxic mix of a tumbling currency, rising yields, accelerating inflation and sluggish growth.
BoE Governor Mark Carney told a public meeting on Friday that he was willing to allow inflation to run "a bit" higher than the central bank's 2-percent target to help employment and allow Britain's economy to grow.
Nonethless, sterling fell to $1.2165, having lost over 6 percent in the past two weeks after May raised the spectre of a "hard" Brexit, where the government will negotiate for an exit that favours tighter immigration controls over free trade, likely curbing foreign investment needed to fund Britain's huge current account deficit.
Trade-weighted sterling was at 73.8, not far from a record low of 73.4 struck last week.
Traders said the selloff in gilts was hurting sentiment.
"Investors are beginning to demand a higher premium for holding UK government debt because of two factors - the political uncertainty and risks about the economic impact of Brexit, and inflation expectations are rising on the back of a rapidly declining pound," said Kathleen Brooks, research director at City Index, a local brokerage.
Writing by Anirban Nag; Editing by Alison Williams