December 19, 2016 / 12:32 PM / 7 months ago

UPDATE 3-Pound recovers losses on hints of plan to match EU payments after Brexit

4 Min Read

* Graphic: Sterling and gilt yields bit.ly/2dgAXn1

* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling index tmsnrt.rs/2hwV9Hv (Recasts after May comments)

By John Geddie

LONDON, Dec 19 (Reuters) - Britain's pound recovered around half of its earlier losses against the dollar on Monday after Prime Minister Theresa May said the country could cover EU funding when it leaves the bloc.

Sterling had earlier shed as much as 1 percent on uncertainty over how the country will help businesses manage its exit from the European Union, and the rising risk of a second Scottish independence referendum.

But it pared some of those losses after May told parliament that Britain will match funding from the EU if it represents good value for money, weeks after Brexit minister David Davis said the UK could contribute to the EU budget in return for access to the single market.

"It's just another sign that the government is trying to alleviate fears of a hard, cliff-edge Brexit. Whenever you get signs like that, sterling jumps," ING currency strategist Viraj Patel.

Trade minister Liam Fox said on Sunday Britain may need a transitional agreement to bridge the gap for firms during negotiations with the EU, while the Financial Times reported that EU Brexit negotiators are insisting Britain agree to its European divorce settlement before any such transitional deal.

In a sign of how British firms have been shaken by Brexit, a survey showed half of employers think the country's attractiveness as a place to invest and hire will diminish over the next five years as it leaves the EU.

Brexit has also fed concerns over the prospect of another independence referendum in Scotland, which strongly backed EU membership in June's Brexit vote.

The Scottish government on Sunday said it would this week publish proposals for how it can remain in the EU's single market after Britain leaves the bloc, in order to avoid the "national disaster" of a "hard Brexit".

By 1705 sterling was trading down half a percent on the day at $1.2416, having fallen to as low as $1.2355 as May began speaking to parliament, while the greenback held close to its highest level in 14 years against a basket of currencies.

The pound has shed nearly 2 percent against the dollar over the past two weeks and has lost almost 17 percent since the vote for Brexit in June.

Against the euro, sterling was down 0.5 percent in the day at 84.10 pence, having earlier struck a 10-day low of 84.50 pence, staying within sight of a five-month low of 83.02 pence .

The Bank of England's trade-weighted broader measure for the currency closed at an 11-day low of 78.2.

"The pound has been dribbling lower as the EU debate trundles on," Societe Generale currency strategist Kit Juckes said.

"The sense you get is that the UK negotiators still want to have their cake and eat it ... and we may have seen most of the optimism that this is going to go well come and go at this point."

The latest data from the Commodity Futures Trading Commission showed investors continued to reduce bets against sterling, with net shorts at their smallest since the third week of September.

Additional reporting by Jemima Kelly; Editing by Toby Chopra

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