FOREX-Sterling tumbles as UK GDP disappoints; dollar gains

* UK GDP figures dash hope downturn ending

* Sterling weakness keeps U.S. dollar up against basket

* Euro holds near $1.50 but retreats from 14-week high

* Euro zone data shows bloc's recovery generally on track (Updates prices, adds comment, details)

By Wanfeng Zhou

NEW YORK, Oct 23 (Reuters) - The dollar and euro soared against sterling on Friday after data showing the UK economy was still mired in recession stunned investors who had expected it to return to growth.

The pound shed almost 4 cents against the dollar as it fell from a six-week high after the British government said the economy contracted 0.4 percent between July and September, making the current recession the longest on record. For story, see [ID:nLN250789]

The euro also gained against sterling, supported partly by data that suggested the euro zone recovery is gathering pace. But it retreated against the dollar after hitting a fresh 14-month high around $1.5060.

The UK data quashed hopes that the downturn there was ending and rekindled talk that the Bank of England will have to extend an emergency asset-purchasing program next month.

The news "opens the way for further increases in (quantitative easing) which could prove very damaging to the pound in the short term," said Boris Schlossberg, director of currency research at GFT Forex in New York.

In late New York trading, the pound was down 1.9 percent at $1.6310 after falling as low as $1.6300, according to Reuters data, far from a six-week peak near $1.67 touched earlier. The euro rose 1.7 percent to 91.98 pence . (For a graphic showing UK GDP growth, click here: http://graphics.thomsonreuters.com/109/UK_Q3GDP1009.gif)

Sterling's sharp fall helped keep the dollar in positive territory against a basket of currencies <.DXY>. The ICE Futures U.S. dollar index was up 0.5 percent on the day, after hitting a 14-month low earlier this week.

"The GDP number out of the UK weighed on risk appetite in general and that's helping the dollar," said Omer Esiner, senior market analyst at Travelex Global Business Payments in Washington.

YEN PRESSURED

The dollar rose 0.7 percent to 92.06 yen after hitting a one-month high as the spread between 10-year U.S. and Japanese government bond yields widened in favor of the dollar. That makes U.S. bonds more attractive to Japanese investors.

The yen also suffered after Japan's banking minister said the country needed a second extra budget worth around 10 trillion yen, feeding expectations of higher government debt.

The euro was down 0.1 percent at $1.5001 . The euro zone single currency has climbed more than 7 percent against the dollar this year, breaking above $1.50 this week as markets brace for the Federal Reserve to hold U.S. interest rates at record lows well into next year.

Late Thursday, Chicago Fed President Charles Evans said the Fed is nOt worried about inflation right now but is monitoring it closely.

A survey released Friday showing that sales of previously owned U.S. houses hit a two-year high in September briefly boosted U.S. stocks, but economists say a weak labor market will continue to drag on the economy in the months ahead. [ID:nN2390489]

Michael Woolfolk, senior currency strategist at BNY Mellon in New York, said some large speculative bets against the dollar had been toned down on Friday now that the $1.50 level has been breached.

But London-based Rabobank strategist Jeremy Stretch said "markets will use dips to buy (the euro) at better levels."

Earlier Friday, euro zone purchasing managers indexes and the Ifo index of German business morale showed the bloc's economic recovery to be generally on track. [ID:nLN608219] (Additional reporting by Steven C. Johnson; editing by Dan Grebler)