* Sterling hits highest level vs dollar since Oct. 5
* Lifted in thin trade by Middle East, corporate demand
* Pound jumps versus weak yen, recovers against euro
By Philip Baillie
LONDON, Dec 17 Sterling hit a two-and-a-half month high against the dollar on Monday and traders said it was lifted in thin trading by demand from Middle East investors and companies looking to hedge.
Sterling rose to $1.6217, its highest level since early October, taking it just shy of chart resistance at $1.6218, the Oct. 5 high.
The pound last traded up 0.3 percent on the day at $1.6206 and more gains could take it towards the September peak of $1.6310.
Analysts said the pound could gain further against the dollar if U.S. politicians cannot head off the tax rises and spending cuts due to kick-in at the beginning of 2013.
"Sterling tends to be caught in the middle of the euro and the dollar but we are seeing some underpinned strength, which (today) seems to be flow driven," said Daragh Maher, currency strategist at HSBC Markets.
Traders said demand from Middle East investors buoyed the pound in early trade. Later, demand from corporates also surfaced, while one trader reported Asian names buying.
Investors will look to inflation data on Tuesday and Bank of England policy meeting minutes on Wednesday for clues on the chances of UK policymakers authorising more bond buying. Retail sales data is also due on Thursday.
Melinda Burgess, currency strategist at RBS, said she expected retail sales to lift the pound if they beat forecasts.
"Generally the BoE is remaining dovish in terms of their stance but sterling will probably react more to retail sales this week, which is expected to pick up and could show a positive bounce," she said.
Burgess said sterling could fall to $1.56 in the first quarter of 2013, however, if U.S. budget concerns are soothed and weaker UK growth is exposed.
The pound also recovered against the euro, which was down 0.1 percent at 81.29 pence, having hit a near two-month high in Asian trade of 81.505 pence.
Slightly stronger UK inflation and retail sales data may add to expectations that the BoE will hold off from more quantitative easing for the time being, which would also help lift sterling, analysts said.
Quantitative easing is usually negative for a currency as it increases its supply.
Jane Foley, senior currency strategist at Rabobank, said the pound had benefited against the dollar in recent sessions in the wake of last week's monetary easing in the United States.
Against the Japanese yen, the pound rose to its highest level since April 2011 at 136.37 yen. The yen weakened broadly after the weekend election victory of Shinzo Abe's conservative Liberal Democratic Party, which is committed to aggressive monetary easing.