* Pound down more than 0.5 pct vs dollar
* Report of mounting challenge to May’s leadership hurts sterling
* Dollar index edges up following spike by US Treasury yields (Adds details, updates prices)
By Shinichi Saoshiro
TOKYO, Nov 13 (Reuters) - The pound slipped early on Monday as troubles mounted for British Prime Minister May, with a report that 40 Conservative MPs are readying a leadership challenge, while Brexit talks face a crucial deadline.
The dollar received a lift against its major peers as U.S. yields spiked and as the pound stumbled, although the main investor focus was still on a planned U.S. tax overhaul.
Sterling was last down 0.55 percent at $1.3120, pulling away from an eight-day peak of $1.3229 scaled on Friday on better-than-expected data on British industry.
“There were some headlines released over the weekend that were negative for prime minister May, and the market began the week by digesting the reports and then sending the pound lower,” said Kyosuke Suzuki, director of forex at Societe Generale in Tokyo.
The Sunday Times reported over the weekend that 40 members of parliament from British May’s Conservative Party have agreed to sign a letter of no-confidence in her.
That is eight short of the number needed to trigger a party leadership contest, the mechanism through which May could be forced from office and replaced by another Conservative.
Also, Brexit minister David Davis said on Sunday that Britain will not offer a figure or a formula for how much it believes it owes the European Union, highlighting the lack of progress plaguing the divorce negotiations.
Against the yen, the pound was last down 0.45 percent at 149.12 yen.
The dollar index against a basket of six major currencies was 0.15 percent higher at 94.533, following a 6 basis points rise by long-term U.S. Treasury yields on Friday.
The index had ended the previous week on a loss of 0.6 percent amid investor disappointment that a proposed U.S. corporate tax cut could be delayed until 2019 instead of being implemented in 2018.
“The sharp rise by Treasury yields certainly is not hurting the dollar. But the yield rise appears mostly technical in nature - the recent flattening trend is being unwound - so the positive impact on the dollar is limited,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.
Bond traders had favoured longer-dated Treasuries over shorter-dated issues the past two weeks on concerns about the tax overhaul and a diminished likelihood of an introduction of a Treasury bond that matures beyond 30 years.
As a result, the spread between the two-year and 10-year Treasury yields reached its lowest since 2007 last week, before rising slightly.
“In my view, the U.S. tax reform talks are proceeding roughly according to schedule. It cannot get much worse, and this is a supportive factor for the dollar,” Yamamoto at Mizuho Securities said.
The greenback was up 0.1 percent at 113.660 yen. The euro slipped 0.1 percent to $1.1653.
Elsewhere, the Australian dollar lost 0.05 percent to $0.7655 to edge back towards a 3-1/2-month low of $0.7625 marked at the end of October. The currency has come under pressure with its yield buffer over the greenback shrinking to its narrowest since 2001.
The market has pushed out the prospect of a rate hike in Australia, while almost fully pricing in a U.S. rise for December and at least one more next year.
The New Zealand dollar shed 0.15 percent to $0.6923 .
Editing by Richard Pullin; Editing by Sam Holmes