FOREX-Euro, sterling advance on rate rise prospects

* Euro extends rise in the wake of ECB comments on inflation

* Sterling gains after BoE minutes

* Middle East/North Africa situation remains a worry (Updates prices, detail)

By Jessica Mortimer

LONDON, Feb 23 (Reuters) - The euro and sterling rose versus the dollar on Wednesday, buoyed by expectations that interest rates in the euro zone and UK will rise sooner than U.S. rates, a factor that is likely to keep the greenback under pressure.

A UK rate hike in the coming months looked more likely after minutes to the Bank of England's February policy meeting showed a third policymaker voted for a hike while others would consider one if UK economic recovery resumed. [ID:nLDE71M0TH]

Traders said prospects of higher inflation and interest rates took centre stage in currency markets, pushing aside concerns about political tensions in North Africa and the Middle East. Still, analysts said the market was wary and the dollar could see renewed safety bids if unrest in the region spreads and oil spikes higher.

ECB officials Yves Mersch and Nout Wellink said on Tuesday they were ready to fight inflation by raising rates when needed, prompting rate futures to price in a 25 basis point hike in August. [ID:nLDE71L23Y] [ID:nLDE71L13A]

"The interest rate story is the main driver for euro and sterling as market players try to price in the fact that rate hikes may be starting earlier than previously expected," said Stephan Maier, currency strategist at Unicredit in Milan.

ECB President Jean-Claude Trichet is due to speak later on Wednesday and market players will be looking to see whether he adds to the hawkish tone of Mersch and Wellink.

The euro was up 0.6 percent at $1.3736. Market players said the euro was supported by earlier buying by Asian central banks and by real money selling of dollars following a drop in U.S. Treasury yields the previous day.

However, some traders said the single currency could succumb to profit taking, with Asian central banks also reported leaving offers at $1.3740-50. The euro was down 0.1 percent against the pound at 84.55 pence as investors priced in chances that the BoE will start raising rates sooner than the ECB.

Sterling was up 0.7 percent at $1.6243 , though it was off a high of $1.6275 just after the BoE minutes, with traders wary of pushing the currency too much higher due to concerns about a fragile UK economy.

Against a basket of currencies, the dollar <.DXY> was down 0.4 percent at 77.456, near an earlier three-week low of 77.411 and well below a high of 78.326 hit on Tuesday.

MIDDLE EAST, LIBYA TENSIONS

The euro faced resistance around the Feb. 9 peak at $1.3745. A clear break of $1.3750 could open the way for more gains, with the next major resistance seen at $1.3862, a three-month peak hit in early February.

Tuesday's ECB comments caused the euro to bounce sharply from Tuesday's low of $1.3525, when unrest in Libya caused oil prices to spike, prompting investors to cut risk exposure and lifting safe-haven flows into the dollar and Swiss franc.

The euro and perceived higher-risk currencies remained vulnerable, however, to any worsening of tensions in North Africa and the Middle East. Oil prices have firmed on concerns the unrest may spread to other oil-producing nations. [O/R]

Global stocks were also lower, although U.S. stock futures pointed to a firm start on Wall Street. "There are still a lot of uncertainties in North Africa, but the impact tends to wane if there is no new news," said Niels Christensen, currency strategist at Nordea in Copenhagen, but he added that markets would keep a close eye on oil prices.

A defiant Muammar Gaddafi, Libya's leader, said on Tuesday he would not be forced out by the deadly unrest sweeping Africa's third-largest oil producer. [ID:nLDE71L2LE]

Rising oil prices kept a lid on the yen with the Japanese economy vulnerable due to high oil imports. Dollar/yen was up 0.1 percent at 82.81 yen, with talk of decent-sized option expiries at 82.90 and 83.00 yen for later on Wednesday.

The New Zealand dollar was flat at $0.7469, having hit a two-month low of $0.7433 after Tuesday's deadly earthquake raised concerns about the economy. Those concerns were seen reducing the likelihood of rate rises this year and could even prompt the central bank to cut rates. [ID:nL3E7DM1YX] (Additional reporting by Anirban Nag) (Editing by Susan Fenton)