Sterling weakens on soft UK services PMI; BoE decision eyed

LONDON, May 6 (Reuters) - Sterling weakened on Tuesday after data showed the UK service sector stagnated in April, providing further evidence the credit crunch is biting into economy growth and raising the chance of another interest rate cut perhaps as soon as Thursday.

The Chartered Institute for Purchasing and Supply/NTC service sector purchasing managers index fell to 50.4 in April, signalling meagre growth and its lowest level in five years, from 52.1 in March. Analysts had expected a decline to 51.6.

The UK economics teams at two heavyweight investment banks -- JP Morgan Chase and Deutsche Bank -- subsequently changed their forecast for this week's Bank of England policy meeting to a quarter percentage point cut to 4.75 percent.

Financial markets attatch a roughly 40 percent chance of a cut from the Bank's Monetary Policy Committee this week.

"As a result of the recent softer economic news, we have decided to revise our call from unchanged rates to a 25 bps move at this week's meeting," Deutsche's George Buckley said.

"However, we would reiterate that we think the risks are very finely balanced. Should we be wrong on this new call and the MPC opts to keep rates on hold on Thursday, then we expect they will instead cut next month. At the very least, we believe that the market is not appropriately priced for the risk of a cut on Thursday."

At 1430 GMT the euro was up 0.4 percent on the day against the pound at 78.90 pence <EURGBP=>, and the BoE's broad trade-weighted sterling index was down two thirds of a percent on the day at 93.10 <=GBP>.

Sterling edged up 0.2 percent against the struggling dollar to $1.9760 <GBP=>, bouncing back more than a cent from the post-PMI lows as the greenback slumped in the wake of weak Fannie Mae earnings and a lower open on Wall Street.

Implied interest rate spreads mostly moved against sterling following the UK services sector data, eroding the pound's relative attractiveness to currency traders and investors.