Sterling retreats from $2 as UK, US data contrast

* Sterling steady at $1.9936 <GBP=>

* Briefly rises above $2 for first time since late April

* UK manufacturing contraction contrasts with strong ISM

LONDON, July 1 (Reuters) - Sterling retreated from a two-month peak above $2 set earlier on Wednesday as a surprisingly strong U.S. manufacturing survey contrasted with news of contraction in that sector in Britain.

The UK manufacturing PMI fell to 45.8 in June, its lowest since December 2001, and the May figure was also revised down to show contraction.

Initially though investors focused on the index components showing input prices and output prices rising at their fastest rate since the respective series began in 1990s -- taking this as a sign that the Bank of England won't cut rates anytime soon.

But the ailing health of the UK manufacturing sector was brought back into focus -- to sterling's detriment -- by the release of the comparable index for the United States, which proved surprisingly strong.

"The sterling story is very ugly and I would expect it to stay that way," said John Hardy, FX strategist at Saxo Bank, adding that sterling's early gains had been driven by scaling back of overextended short positions on the currency.

By 1410 GMT sterling was steady on the day at $1.9936, having retreated from an earlier two-month peak of $2.0006 <GBP=>. The euro was flat at 78.71 pence <EURGBP=>.