* 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 UK 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 introduced 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 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-purchasing 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."
Sterling fell broadly after the data, pushing the euro as high as 94.10 pence, its strongest since late March. It hit a five-month low against the dollar and a six-month trough versus a currency basket.
Sterling/dollar later reversed its losses, hitting the day's high of $1.5845 after BoE Deputy Governor Charles Bean said the UK economy had probably hit rock bottom..
But the CPI 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.
Low rates make UK assets less attractive to some investors.
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.
Some in the market are focusing on 95 pence, with some technical analysts saying further gains may be limited.
Phil Roberts at Barclays Capital said 95 pence was the 78.6 percent Fibonacci retracement of euro/sterling's move from the December 2008 record high of 98.05 pence to the 2009 low of 84.00 pence hit in June.
Others see sterling falling further, in part due to a perception UK authorities are not opposed to a weaker currency, which helps exporters. BoE Governor Mervyn King said last month a weak pound was helping to rebalance the UK economy.
NET POUND SHORTS PILE UP
Traders on Tuesday ignored data showing the fastest rise in UK house prices since the credit crunch began and the fastest year-on-year climb in retail sales in five months in September.
They focused on a PricewaterhouseCoopers report, which highlighted the UK's indebtedness and said it needed to balance its books by the 2015/16 tax year rather than 2017/18, as planned in the government's April budget.
The 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.
Investors have been fleeing UK assets. Data shows traders increased net short sterling positions to more than 62,000 contracts in the latest week, a new record, Morgan Stanley said.
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. This would drive it lower.
Sterling on Tuesday hit fresh multi-decade lows against the higher-yielding Australian dollar and the Norwegian crown.
"Sterling is down because the BoE will keep doing whatever it takes to help the economy, meaning rates at zero and possibly more QE in November, whereas other central banks have hiked -- like the RBA -- or will likely do so, like the Norges Bank," said Geoff Kendrick, currency strategist at UBS in London.
(Additional reporting by Tamawa Desai; editing by Nigel Stephenson)