Pound falls, short stg up after weak output data

LONDON, May 7 (Reuters) - Sterling extended losses versus the dollar on Wednesday and short sterling rallied after manufacturing and industrial output data came in weaker than expected, fuelling speculation that the Bank of England is set to cut rates soon.

British manufacturing output fell at its sharpest rate in six months as a decline in car production led to a retreat after two months of strong growth [ID:nONS003506].

By 0833 GMT the pound was at $1.9571, from $1.9595 just before the data <GBP=>. The euro was up 0.55 percent at 79.11 pence <EURGBP=>.

Short sterling contracts, a gauge of near-term interest rate expectations, rallied to turn positive and yields on benchmark 10-year gilts shed some gains after the data.

The front month June short sterling contract was 2 ticks higher at 94.52, having traded 1 tick lower prior to the release. Yields on 10-year government bonds were 3 basis points higher, having traded 4 basis points higher before the data.

"The data is softer than expected, with manufacturing falling back after two strong months this year," said David Page, an economist at Investec.

"We still think that weakness in the economy will lead to an interest rate in June, and the data supports this."

(Reporting by Naomi Tajitsu and Simon Falush)