December 10, 2012 / 9:43 AM / 5 years ago

Sterling hits near 3-week high vs euro as Italy weighs

* Sterling climbs versus broadly weaker euro

* Euro drops as investors fret over Italian politics

* Pound looks likely to benefit from safe-haven flows

By Philip Baillie

LONDON, Dec 10 (Reuters) - Sterling hit a near three-week high against the euro on Monday, with the shared currency coming under broad pressure as investors fretted over the Italian prime minister's decision to resign.

Italian Prime Minister Mario Monti said on Saturday he would resign after the 2013 budget is approved, increasing political uncertainty in the heavily indebted country and dragging on the euro.

The euro dropped 0.1 percent against the pound to 80.46 pence. It hit a low of 80.35 pence in thin Asian trade, although some London-based spot traders called the day's low at 80.38 pence.

Further weakness could see the euro test the Nov. 8 low of 79.605 pence.

"Sterling is winning by default on euro weakness," said Adam Cole, global head of FX strategy at RBC Capital Markets. "It is the rapid escalation of political risk in Italy."

He said the shared currency could target the 80 pence mark as the market continued to worry about the political situation in Italy, but did not expect it to extend losses below that level.

Against the dollar, sterling was close to flat on the day at $1.6034, holding above Friday's low of $1.6002.

The pound has fallen against a broadly stronger dollar in recent sessions, with the greenback helped by faster-than-expected U.S. employment growth that prompted bets the Federal Reserve could opt for a smaller stimulus programme when it meets this week.

With limited UK data due out this week some strategists said the pound would take direction from developments in the United States and euro zone.

"This week we are going to be caught in the crossfire of euro/dollar moves from the FOMC (Federal Open Market Committee) meeting and political risk developing in the euro zone," said RBC's Cole.

Some analysts said the pound could benefit from safe-haven flows out of the euro as market players fret over political uncertainty in peripheral countries and amid speculation the European Central Bank could be considering a future rate cut.

"We continue to expect sterling to benefit from safe-haven flows in the face of negative shocks to the euro area," Barclays told clients in a morning note.

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