(Corrects 2nd bullet point to show 2-wk high, not 2-mth)
* Sterling hits 7-1/2-year low vs dollar on UK banking woes
* Euro up from 6-wk low vs dlr; hits 2-wk high vs pound
* Pound down 1 percent vs dollar at $1.3755
* FTSE down 1.5 percent by midday; Barclays shares down 20 percent
(Releads, adds comment, updates prices)
By Tamawa Desai
LONDON, Jan 21 (Reuters) - Sterling tumbled to fresh 7-1/2 year lows against the dollar on Wednesday as UK banking shares took another beating, while the euro broadly edged higher.
The pound, which has fallen roughly seven percent against the U.S. unit since the start of the week, extended losses on concerns that UK banks will need to shore up their financial health as the economy deteriorates, and that a government package announced earlier in the week may not help.
Shares in Barclays Plc and Lloyds Banking Group posted double-digit declines in morning trade, pulling the top index of UK shares lower.
"Sterling and UK banks remain the dominant theme in currency markets. As long as UK banking stocks are down, we don't see a big reversal in sterling," said Adarsh Sinha, currency strategist at Barclays Capital.
"Financial sectors in other countries are not doing any better than Britain, but sterling is an easier target because it is not a reserve currency such as the dollar or euro and thus more vulnerable to problems," he added.
By 1201 GMT, sterling was down 1.0 percent at $1.3762 after falling to $1.3715, the lowest since June 2001.
The British unit was at 123.62 yen, down 0.8 percent after hitting a record low of 123.01 yen.
Barclays shares tumbled a third in value to a 24-year low. London's index of top shares was down 1.5 percent by midday trade.
Data on Wednesday showed a sharp deterioration in Britain's public finances and a rise in joblessness, but such data and the release of minutes from the latest Bank of England policy meeting were overshadowed by banking sector woes.
BoE minutes showed the BoE's Monetary Policy Committee voted 8-1 to cut interest rates by 50 basis points to a record low of 1.5 percent this month, with arch-dove David Blanchflower calling for a 100 bps reduction.
Policymakers also said the fall in the pound would help support growth and the rebalancing of the economy. But they noted that if there were indications -- perhaps from lower gilt prices -- that a weakening exchange rate reflected a loss of credibility in UK policy, then that would be bad news for the medium-term outlook.
The euro was firmer across the board as it gained against the pound, rising more than 1 percent to 94.10 pence, its strongest since the start of the month and inching closer to a record high of 98.05 pence hit last month.
Speaking before parliament, European Central Bank President Jean-Claude Trichet played down the threat of deflation, while rebuffing talk that some euro zone member states would leave the union given the financial crisis.
He added that all global currencies were under pressure.
Meanwhile, the dollar was little changed against the yen at 89.80 yen.
"It's still a positive environment for the dollar, with equities down. The dollar and the yen are still strong in this risk-averse environment," said Marcus Hettinger, global currency strategist at Credit Suisse in Zurich.
"With other central banks cutting rates down to the level of the U.S. and Japanese central banks, there's still more downside for currencies like sterling and the euro."