August 11, 2017 / 8:05 AM / 12 days ago

Sterling near three-week lows as outlook cloudy

* Graphic: sterling and gilt yields bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Saikat Chatterjee

LONDON, Aug 11 (Reuters) - Sterling held near a three-week low against the dollar on Friday as investors grew wary about the outlook of the British economy after a mixed bag of data this week.

"The July bounce in sterling was on some expectations that the Bank of England will increase interest rates at its last policy meeting, but with fundamentals looking increasingly downbeat for the economy, it seems to be a path of gradual weakness for sterling," said Viraj Patel, an FX strategist at ING in London.

On Friday, sterling was broadly steady at $1.2978, a shade above a three-week low of $1.2952 hit in the previous session. It is on track to post its biggest two-week decline against the dollar since March 2017.

The pound has lost more than 13 percent in trade-weighted terms since last year's decision to leave the European Union, but Britain's trade deficit with the rest of the world remains huge.

As the economic picture has become cloudier, money market pricing for a rise in UK interest rates this year has collapsed and is the main driver of sterling selling since the start of August, analysts say.

Data this week showed falling car production and a slide in construction, which bode poorly for future months after a more general slowdown in the first half of 2017.

Inflation data next week will be the big driver for sterling. Data last month showed an unexpected slowdown in price pressures for the first time since October.

Against the euro, the pound rose 0.2 percent to 90.56 pence . Morgan Stanley strategists predicted euro parity with the pound in the first quarter of 2018.

Reporting by Saikat Chatterjee

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