* Sterling falls broadly on UK econ, bank woes
* Sterling hits 7-1/2 yr low of $1.3936
* UK inflation falls less than expected to 3.1 percent
* BoE's King to deliver keynote speech
(Adds inflation data, updates prices)
By Tamawa Desai
LONDON, Jan 20 (Reuters) - Sterling fell broadly on Tuesday as investors seized on concerns about the ailing British banking sector and the government's potential debt burden, while data showed UK inflation fell less than expected.
The pound hit a 7-1/2 year low against the dollar, continuing its weak tone after Royal Bank of Scotland recorded the biggest loss in British corporate history on Monday, and was on track for its biggest one-day fall against the U.S. unit since late 1992.
Sterling also hit a record low against the yen after the impact of Britain's multibillion-pound rescue plans aimed at boosting bank lending quickly dissipated.
"Sterling is set to weaken further," said Neil Jones, head of hedge fund sales at Mizuho in London. "A combination of forces is in play: Interest rates moving to near zero, printing cash, heavy debt issuance, (bank) nationalization, lower overseas foreign investment into the UK economy which has an extremely high dependence on its financial system."
The prospect of the British government needing to issue debt to cover for the latest package weighed on sterling, after sovereign ratings of some euro zone countries such as Spain and Greece have been downgraded recently.
Standard and Poor's reaffirmed UK's long-term AAA debt rating on Jan. 13, with a stable outlook.
The battered UK currency pared some losses after data showed a smaller-than-expected fall in inflation.
By 0934 GMT, the pound was down some three percent on the day at $1.3975, after falling as low as $1.3936, its lowest since July 2001.
The pound's fall against the dollar was also exacerbated by the U.S. unit's broad gains as investors bought the greenback on risk aversion plays, said David Powell, currency strategist at Bank of America in London.
Sterling also fell three percent against the yen to a new record low of 126.65 yen.
The pound also hit a two-week low against the euro, down 1.7 percent at 93.11 pence.
Britain's top share index rose some one percent in morning trade after two sessions where banks were heavily battered.
Data showed British consumer price inflation fell by its biggest margin since April 1992 in December, but less sharply than analysts had forecast.
The headline rate of consumer price inflation slowed to 3.1 percent from 4.1 percent, its lowest since April 2008, but still above the Bank of England's 2 percent target and below the forecast of 2.7 percent.
BoE Governor Mervyn King is set to deliver his first keynote speech of the year, with anticipation that he will elaborate on the central bank's new asset plan and prospect for so-called quantitative easing.
The bank plan unveiled on Monday included a new 50 billion pound facility that would allow the BoE to buy high quality assets and most strikingly, the central bank would be allowed to use this framework to boost the money supply in order to boost the economy as it runs out of room on interest rates. (Additional reporting by Jamie McGeever; Editing by Andy Bruce)