* Sterling adds to losses, hits lowest in 2 weeks vs dollar * Pound stung by European election, UK political uncertainty * Euro/sterling falls after S&P Ireland downgrade
LONDON, June 8 (Reuters) - Sterling fell against the dollar to near a two-week low on Monday after a collapse of support for the UK's ruling Labour Party in the European election raised the chances of further challenges to Prime Minister Gordon Brown.
Despite its losses against the dollar, the pound rose against the euro, as the single European currency came under broad selling pressure after Standard & Poor's cut its sovereign rating on Ireland for the second time in three months.
Analysts said Labour's drubbing in weekend European elections added to the uncertainty surrounding the political future of Britain's embattled prime minister, who reshuffled his Cabinet on Friday after six of the party's ministers quit.
General political instability was adding to concerns about the hobbling UK economy, they said, which traders were taking as green light to dump the UK currency.
"The election results put more pressure on Brown," said Paul Robinson, chief sterling strategist at Barclays in London. "We don't know who will be prime minister in a month's time ... We don't know if he's going to stay, which is an uncomfortable position for an economy to be in."
By 1053 GMT, sterling
The pound fell versus the dollar for the fourth straight day, having already slumped nearly 5 percent from a seven-month high above $1.66 hit less than a week ago.
The pair clawed back some losses, boosted by a broad fall in
the euro
The euro came under selling pressure after S&P on Monday cut its credit rating on Ireland to AA from AA+.
Against a basket of currencies <=GBP>, sterling was at 81.3, near 81.0 hit on Friday for its lowest in more than a week.
Sterling has reversed gains against the dollar following a dramatic rally in the past month or so as speculation that a recovery in the global economy had cranked up demand for currencies considered to be higher-risk, including the pound.
Market participants said that ongoing uncertainty about Brown's future would hinder government initiatives to pull the UK economy out of a recession, sparking profit taking in the pound after its hefty gains.
Some analysts said that this would weigh on sterling in the near term and may push it down to around $1.55.
"Political turmoil is shifting focus away from economic stability. This is not good for the currency," said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank in London.
With Labour almost certain to lose the next general election, some in the market say they would favour a strong Conservative government that would take decisive measures to bring down Britain's swelling debt burden. [ID:nL51011390]
If Brown is forced out now, that might put in office a new Labour prime minister who could restore some of the party's fortunes by the next general election, which is due by June 2010. That could prevent the Conservatives from winning a strong mandate in the elections.
Robinson at Barclays said that selling of sterling would subside when it becomes clearer whether or not Brown will stay on as prime minister.
A change in government would likely have limited impact on the UK currency, he added, arguing that such a shift would not fundamentally alter the balance of economic policy.
"Even if there were a change of government, because of the large fiscal deficit, an incoming government could not really drastically change policy," he said.
"So (the recent turmoil) is unlikely to have a lasting effect on sterling in the long run." (Reporting by Naomi Tajitsu; editing by Toby Chopra)