* Pound seen weakening vs dollar before regaining ground
* 12-month forecasts in wide range of $1.28 to $1.86
* Sterling to strengthen against euro over the year
By Jonathan Cable
LONDON, June 3 (Reuters) - Sterling will slip from current seven-month highs in the next few quarters but will climb towards the end of the year as the British economy begins to recover and risk appetite returns, a Reuters poll found.
The poll of around 60 analysts' forecasts, taken before data showing Britain's dominant service sector staged a surprise return to growth, saw the pound trading at $1.57 in three months, down from the $1.65 it was at on Wednesday.
The pound was seen holding around $1.55 in six months before climbing to $1.61 in a year, as consensus forecasts were revised up from the May poll.
Sterling hit a 23-year low of around $1.35 in January but has since rallied as markets considered the falls were overdone, rising some 12 percent in the past month alone, and hitting a seven-month high of $1.6664 on Wednesday.
"The speed and scale of the rally in pound/dollar above 1.64 is arguably overdone and will eventually be subject to profit taking if risk appetite fades," said Kenneth Broux at Lloyds TSB.
The UK economy has been in deep recession and the Bank of England, which has cut interest rates to just 0.5 percent, has begun a programme to inject 125 billion pounds directly into the money supply.
However, recent data suggests the worst may be over for the economy and PMI figures released earlier showed the UK service sector grew in May for the first time in over a year while consumer confidence reached a six-month high.
"Bad news on the UK economy should be fully factored in, so that further green shoots coming from British PMI surveys should boost sterling further higher," said Roberto Mialich at UniCredit MIB.
Sterling has climbed against the dollar in recent weeks as a rally in U.S. stocks has prompted traders to dump the greenback in favour of higher-risk currencies. In the May poll none of the forecasters had predicted the pound would have recovered to its current levels by now.
The BoE is expected to leave rates unchanged when it announces its policy decision on Thursday. It is also likely to spend eventually the full 150 billion pounds on asset purchases which has been authorised by the government, possibly muddying the waters for the pound.
Forecasts in the survey reflected this and were wide, ranging from $1.28 to $1.86 in a year, but all a long way from the $2.10 the pound was trading at 18 months ago.
Sterling volatility is expected to hold around levels seen in May, despite sterling's climb in recent weeks.
EURO WEAKENS
The pound will also strengthen against the euro over the year, having nearly reached parity in December. Cross rates calculated by Reuters see the euro at 86 pence in six months and 85 pence in a year.
This compares with 87 pence and 86 pence respectively in the May poll and comes after sterling hit a six-month high against the euro of 86 pence earlier on Wednesday.
"Resistance on behalf of the ECB to consider more private asset purchases or lower the refi rate below 1 percent may also weaken the euro if the improvement in euro zone economic data stalls in H2," Broux said.
British GDP fell 1.9 percent in the first quarter, its sharpest rate in 30 years, but the 16-nation euro zone is also in the throes of a deep recession, having shrunk a staggering 2.5 percent in the same period.
Analysts say the worst is now past for Britain and see a return to growth in the first quarter of next year. (Polling by Bangalore Polling Unit; editing by David Stamp)