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* Graphic: Sterling and gilt yields bit.ly/2dgAXn1
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv
By Ritvik Carvalho
LONDON, May 23 (Reuters) - Sterling slipped against the dollar on Tuesday, with a suicide bombing in the English city of Manchester and concerns over the ruling Conservative Party's campaign for next month's election putting the currency on the defensive.
The pound fell as low as $1.2954 in morning trade in London, down 0.3 percent on the day, before recovering to trade only slightly lower at $1.2989.
"The key message for sterling is it's on the defensive this week and that is likely to continue," said ING currency strategist Viraj Patel, noting sterling was underperforming versus its European peers this week.
The pound was 0.2 percent lower at 86.61 pence per euro.
In an unexpected twist to the election campaign - suspended after the bombing - a pair of weekend polls showed Prime Minister Theresa May's Conservatives' lead halving over the opposition Labour Party, pulling the pound lower from its perch near seven-month highs on Monday.
The narrowing of the polls also forced May into what most domestic media called a U-turn on one of her most striking campaign pledges - to force elderly people to pay more for their social care - as they showed it alienating ageing, wealthy homeowners, a core source of Conservative voters.
"There's greater two way risk given that you had the positioning adjustment plus the narrowing of the polls and also just a narrower focus on the election. A lot of good news from these elections is already priced in sterling," Patel said.
Speculators further slashed "short" bets against the pound to 32,995 contracts in the week to last Tuesday, the lowest since March last year.
Data on Tuesday showed Britain's budget deficit widened by more than expected at the start of the new financial year as value-added tax revenues flatlined, reflecting the strain on consumers from rising inflation driven by the pound's nearly 20 percent fall in the second half of last year.
The deficit in April stood at 10.4 billion pounds, up 13.1 percent from the same month last year, the Office for National Statistics said, citing figures that exclude state-controlled banks. (Reporting by Ritvik Carvalho; Editing by Mark Potter)