* Sterling slides after CPI as rates seen staying low * EUR/GBP hits 6 1/2-month high, GBP/USD at 5-month trough
* Trade-weighted sterling hits 6-month low
By Naomi Tajitsu
LONDON, Oct 13 (Reuters) - Sterling hit a 6 1/2-month low against the euro on Tuesday after inflation data cemented the view interest rates would stay near zero, with concern about the UK's fiscal position also prompting traders to dump the pound.
The data, which showed consumer prices rose just 1.1 percent in the year to September, came a day after Prime Minister Gordon Brown warned against hasty withdrawal of the monetary and fiscal stimulus that had sought to foster economic recovery.
Expectations rates will stay at record lows of 0.5 percent and that the Bank of England may extend its support programme of quantitative easing have pummelled the pound in recent months and are making traders pessimistic about its outlook.
Sterling is down nearly 3 percent against the euro and more than 2 percent on a trade-weighted basis this month and market positioning data shows speculators making big bets on a further fall in the pound.
"Today's CPI data suggests that the BoE won't hesitate to increase the asset-puchasing programme," said Hans-Guenter Redeker, chief currency strategist at BNP Paribas in London.
"The likelihood of a BoE move in that direction in November has increased after the data."
The pound hit a five-month low against the dollar and a basket of currencies after the figures.
The data helped support a research consultancy report on Monday which said UK rates may stay at their record low until 2011 and reach only 2 percent by 2014, underlining the pound's relatively dim yield appeal.
Sterling fell broadly, pushing the euro up 0.5 percent on the day to 94.10 pence, its highest since late March. That helped to drive trade-weighted sterling as low as 76.8, its lowest since early April.
The pound fell to a five-month low of $1.5708, before paring those losses as the euro rose against the dollar. By 1237 GMT, it traded up 0.1 percent on the day at $1.5797.
Redeker at Paribas forecast sterling would hit $1.52 by the end of the year, while adding euro/sterling parity -- never seen in the single currency's history -- was possible by then.
A perception UK authorities are not opposed to a weaker currency, which helps exporters, has added to sterling's woes. BoE Governor Mervyn King said last month a weak pound was helping to rebalance the UK economy.
NET POUND SHORTS PILE UP
Positive data on the economy was largely ignored.
A Royal Institution of Chartered Surveyors poll indicated UK house prices are rising at their fastest since the credit crunch began, while separate data showed retail sales rose at their fastest annual pace in five months in September.
Another survey showed the decline in the UK manufacturing and services sectors eased markedly in the third quarter.
"The RICS house price balance was stronger than expected but as we had flagged, the data did little to improve the outlook for GBP," JPMorgan analysts wrote in a note.
A PricewaterhouseCoopers report also released on Tuesday highlighted the UK's indebtedness, saying Britain needed to balance its budget by the 2015/16 tax year rather than 2017/18, as planned in the government's April budget.
A dismal public balance sheet has been a factor in sterling weakness, as the government borrows roughly the equivalent of UK GDP to kickstart the economy.
The British government said on Monday it would raise billions of pounds through asset sales, which also reminded investors of the bleakness of the UK's public finances.
This grim outlook has sent investors running from UK assets. Positioning data shows traders have increased net short sterling positions to more than 62,000 contracts in the latest week, a new record, Morgan Stanley said, and many in the market do not expect a major correction soon.
For a graphic on traders' positioning on sterling, click on http://graphics.thomsonreuters.com/109/UK_CFTGBP1009.gif
With the UK expected to lag the United States, the euro zone and other countries in raising rates, some in the market say sterling is at risk of becoming a funding currency for the "carry" trade, in which investors use low-yielding currencies to buy assets in higher-yielding ones.
(Reporting by Naomi Tajitsu; editing by Nigel Stephenson)