* Gilts soar, curve flattens dramatically on QE steps
* Biggest drop in long-dated gilt yields in over a decade
* Pound extends loss vs dlr
* British interest rates at record low 0.5 percent
* Details of UK asset purchase programme announced
(Adds quotes, updates prices)
By Veronica Brown and Christina Fincher
LONDON, March 5 (Reuters) - British government bonds soared, while sterling fell against the dollar on Thursday after the Bank of England slashed interest rates to a record low 0.5 percent and said it will pursue "quantitative easing".
The BoE said in a statement it will buy assets worth 75 billion sterling with newly-created money, focusing on medium- to long-term gilts, in a drive to help the struggling economy by expanding money supply.
Most of the purchases will be made over the next three months, the Bank said.
British government bond futures shot higher on the news, with long-dated gilts seeing the strongest gains. Yields on 30-year gilts dropped 44 basis points, their biggest one-day fall in over a decade.
"This policy should result in falls in yields in the UK Gilts market, and could help depress yields across a broad range of credit and mortgage markets," said Rob Carnell, economist at ING in London.
"...this puts the Bank of England ahead of the US Fed in terms of the scope of its unconventional easing," he added.
The 10-year cash yield fell nearly 30 basis points to 3.2234
percent
The gap between two- and 10-year yields fell by more than 30
basis points to around 205 basis points
STRLING FALTERS
The pound was expected to weaken further with the onset of quantitative easing, as one by-product of such an expansion in the monetary base is a weaker currency.
It was last at $1.4145
"The surprise, if anything, came in the fact that the BoE announced an amount, which is probably what led sterling to weaken," said Trevor Williams, group head of economic research at Lloyds TSB Financial Markets.
British share prices showed a muted reaction -- with the FTSE 100 <.FTSE> little changed after the decision and QE steps, down 2.1 percent at 3,567.13.
As expected, the European Central Bank cut interest rates to an all-time low of 1.5 percent and signalled further reductions were possible as its staff forecast the euro zone economy would contract by over three percent this year.
The Bank of England said it would start its gilt-buying programme next week and would initially target the five- to 25-year area. [nLAH002577]. (Additional reporting by Jamie McGeever in London; Editing by Ron Askew)