Investors were also cautious ahead of key U.S. employment data, which helped keep currencies seen as higher risk such as sterling under selling pressure.

Bank of England policymaker Tim Besley said it was too early to judge when the central bank will need to start withdrawing the massive stimulus it has delivered to the UK economy.

Meanwhile, a purchasing managers' survey on UK construction activity showed a modest deepening in contraction in the sector, with the index falling to 44.5 in June.

Analysts said Besley's comments and the PMI data helped weigh on sterling, but noted market attention is focussed on the U.S. non-farm payrolls figure due at 1:30 p.m., which will be eyed for clues on the health of the U.S. economy.

Sterling has been hampered since data on Tuesday revealed a much steeper-than-expected 2.4 percent contraction in the UK economy in the first quarter.

"There is a bit of risk aversion ahead of the U.S. payrolls data, which is causing a pullback in stocks and helping to weigh on sterling," Bank of Scotland Treasury currency strategist Naeem Wahid said.

He noted, however, that although it is on the weak side the UK currency remains confined to its recent ranges against the dollar between around $1.62 and $1.66.

A brief break above that range to an eight-month high of $1.6745 on Tuesday was quickly quashed after the weak GDP data.

At 11:38 a.m., sterling was down 0.7 percent against the dollar at $1.6360, having earlier hit a one-week low of $1.6330.

The euro was up 0.2 percent at 86.01 pence, not far off an earlier three-week high at 86.30 pence.

The falls helped push sterling's trade-weighted index down to 83.0, its weakest in two weeks.

Meanwhile, analysts said a 0.8 percent fall in UK equities and declines in oil prices were a further negative for the pound.

SOME OPTIMISM

There was some room for optimism, however, as a BoE credit conditions survey showed British lenders expect to make credit more readily available to households and businesses over the coming quarter, but are not expecting much of a pick-up in demand.

Though the outlook for unsecured credit was less rosy, analysts said the survey signalled the BoE's quantitative easing policies have been filtering through to improve lending conditions.

"The survey raises hopes that credit conditions will increasingly become less of a constraint on economic activity over the coming months. This is critical to recovery prospects," Global Insight economist Howard Archer said.

Speaking in his appointment hearing before parliament's Treasury Committee on Thursday, the Bank's David Miles also struck a more optimistic tone, saying the most rapid declines in output were "behind us."

He noted it remains unclear whether the "substantial depreciation" in sterling will be enough to generate a substantial turnaround in net exports, and that this depends on how sensitive exports are to prices.

(Reporting by Jessica Mortimer; editing by Chris Pizzey)