* Dollar bounces from 4-month low, led by recovery vs sterling
* BoE growth, inflation projections hit sterling
* FT article on threat to US AAA rating weighs on dlr
(Adds quotes, detail, updates prices)
By Jamie McGeever
LONDON, May 13 (Reuters) - The dollar rebounded from a four-month low on Wednesday, rallying against sterling after the Bank of England said it expects anaemic UK inflation and the economy to recover more slowly than previously thought.
The BoE's quarterly inflation report took the wind out of stocks' sails, sending bank shares down 4 percent and sparking a wave of profit-taking from sterling's recent rally that culminated in a four-month high against the dollar on Tuesday.
The dollar had earlier fallen to fresh lows after an article in the Financial Times flagged the risk of the United States losing its top sovereign credit rating.
But the BoE report and subsequent comments from Governor Mervyn King triggered a rebound.
"The overall picture is quite sterling negative. It's more the recovery profile, which is way too optimistic," said Ian Stannard, senior currency strategist at BNP Paribas in London. "(King) was quite pessimistic, and he's probably right to be."
British inflation will fall to as low as 0.5 percent before recovering to just above 1 percent in two years, and the economy will shrink on an annual basis by as much as 4.5 percent at the start of the second quarter this year before recovering more slowly than previously thought.
Some analysts took King's comments that he was pleased with the initial impact of quantitative easing on UK government bond yields as a suggestion that he may also consider sterling weakness as an inevitable side effect of QE, which put the pound under selling pressure.
At 1114 GMT sterling was down 0.8 percent on the day at $1.5148, nearly two cents from levels just before the BoE report was published.
The dollar index, which measures its performance against a basket of six currencies, was last flat on the day at 82.32, having earlier hit a four-month low of 81.871.
The euro was up 0.1 percent at $1.3654, retreating from a seven-week high of $1.3722 on trading platform EBS.
Some in the market said that sterling's losses had prompted selling in the euro against the dollar as King's comments about the economy triggered some risk aversion, boosting the U.S. currency in general.
"The BoE is a large, powerful central bank and what the governor has to say has global repercussions beyond just the pound," said Neil Jones, head of European hedge fund sales at Mizuho in London.
The dollar was down nearly half a percent against the yen at 95.97 yen.
European shares fell 1.5 percent on Wednesday, while UK stocks fell 1.2 percent following King's testimony.
US RATING
Sterling's sharp fall relieved some of the selling pressure on the dollar that had intensified since last week's break below key 200-day and 200-week moving average support levels on technical charts.
The euro has also broken above similar moving averages against the dollar.
Earlier on Wednesday, the FT report had helped push the dollar to fresh multi-month lows, although analysts urged caution because the United States has run persistent and growing budget deficits for years, noting that a downgrade would have huge economic, political and financial implications.
But it put back under the spotlight rising U.S. debt issuance and foreign central banks' willingness to buy and hold that paper, a crucial part of funding the country's deficits and a major crutch for the dollar.
"That's a discussion that's been going on for quite a while, but is it the reason why the dollar is selling off sharply? I'd be very cautious, but it does fit with the theme," said Michael Klawitter, head of currency strategy at Dresdner Kleinwort in Frankfurt.
"You can argue that if we see U.S. yields rising further, major central banks holding Treasuries will take a hit and that will revive discussion on the dollar as the global reserve currency," Klawitter said.
Talk about the potential for fund repatriation flows from Japanese investors related to redemptions and coupon payments on U.S. Treasuries this week also helped push the dollar lower against the yen, traders said.
The U.S. Treasury Department is due to make $21 billion in coupon payments on Friday as part of flows tied to its quarterly refunding moves. Another $52 billion of coupon securities are due to mature, for a total cash outflow of $73 billion.
Investors also awaited U.S. retail sales data at 1230 GMT.