* Sterling hits 2-wk low vs dollar, then trims some losses * Europe vote, UK politics weigh, but losses seem fleeting * Euro/sterling falls after S&P Ireland downgrade
By Naomi Tajitsu
LONDON, June 8 (Reuters) - Sterling hit a near two-week low against the dollar on Monday after a collapse of support for the UK's ruling Labour Party in European elections raised the chance of more leadership challenges to Prime Minister Gordon Brown.
The pound fell as much as 1 percent in early London trade, but trimmed some losses as some traders booked profits from selling in the pound over the past few days, which have pulled it further away from a seven-month high hit last week.
Despite its slide 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 prime minister, who reshuffled his Cabinet on Friday as six of the party's ministers quit.
General political instability was adding to concerns about the UK economy, they said, prompting traders to cut long sterling positions.
"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 1408 GMT, sterling
Analysts said losses were curbed after traders reckoned that recent near 5 percent losses versus the dollar on UK political turbulence may have been overdone.
"Initially there were some concerns about the political outcome of the European elections but sterling has pulled back," said Paul Mackel, director of currency strategy at HSBC.
"Investors are still content to buy sterling on good sized dips, especially against the euro."
The pound was boosted by a broad fall in the euro
Against a basket of currencies <=GBP>, sterling was at 81.2, near 81.0 hit on Friday, its lowest in more than a week.
BROWN FACES MUSIC
Later on Monday, Brown will face Labour members of parliament, some of whom have openly criticised his style of leadership and have urged him to step down. 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 was forced out, that might usher in a new Labour prime minister who could revive the party 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 selling of sterling would subside when it becomes clearer whether or not Brown will stay on, while a change of government would have limited impact on sterling.
"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. (Reporting by Naomi Tajitsu; editing by Mike Peacock)