LONDON, Aug 1 (Reuters) - Sterling hit a two-month low versus the yen on Wednesday as investors unwound carry trades after a fresh wave of risk aversion triggered by concerns over the U.S. subprime mortgage market.

American Home Mortgage Investment Corp said on Tuesday it couldn't fund home loans and might have to liquidate assets and Wall Street firm Bear Stearns halted redemption on a third fund invested in risky credit securities.

The news reignited risk aversion, sparking liquidation of risky carry trades where purchases of high-yielders like sterling are funded by cheap borrowing in currencies such as the yen.

"The recovery taking place yesterday had encouraged people to believe that the worst of the pullback in risk was over. (But) the fact that we've seen fresh stories emerging from the U.S. mortgage market is making people reassess and say this is a story that is not going to wane anytime soon," said Simon Derrick, chief currency strategist at the Bank of New York.

Sterling was down 0.3 percent at $2.0228.
by 0808 GMT, and the euro was up about 0.2 percent at 67.48 pence . It hit a two-month low at 237.71 yen.

Later, investors will be looking at UK manufacturing PMI at 0830 GMT, which is expected to fall to 54.0 in July from 54.3.

The Bank of England policy makers are starting a two-day rate-setting meeting, and their decision is due on Thursday.

The Institute for Supply Management in the U.S. is also due to release its July manufacturing index at 1400 GMT. Economists in a Reuters survey expect a median reading of 55.5 versus 56.0 in June.

"Given that the market seems to be driven quite specifically by the events in the U.S. credit markets, the PMI and ISM numbers will matter less for the market, " Bank of New York's Derrick said.

Source supplied by: Reuters