Sterling fell to its weakest in 2-1/2 months versus a rallying dollar on Monday, as increased risk aversion and poor data and weighed on the currency.

Falling stock prices in Asia indicated a dip in risk appetite which hit the high yielding pound as it is a destination for carry trades where investors borrow low yielding currencies like the yen to fund purchases of higher yielding assets.

House price inflation in England and Wales fell to its lowest in nearly two years at 4.8 percent on the month in December, said property web site Rightmove.

It showed asking prices for homes fell by 3.2 percent on the month, the largest monthly fall since the survey began six years ago.

"The dollar is up after stronger than expected inflation data last week and risk appetite is softer so high yielders are not doing so well," said Paul Robson, currency strategist at Royal Bank of Scotland Global Banking.

"Soft (UK) house price data is also reinforcing the weaker tone (on sterling)."

By 0836 GMT the pound had touched $2.0116, its lowest level since late September. The euro was down 0.17 percent at 71.40 pence .

In more evidence that the UK economy is set to slow, the Confederation of British Industry said on Monday that the UK economy will decelerate markedly next year as the credit squeeze and higher commodity prices take their toll.

With no top tier data on Monday, investors will look to UK inflation data on Tuesday and the publication of the minutes of the Monetary Policy Committee of the Bank of England's December interest rate decision for clues on the outlook for monetary policy.

Source Supplied by Reuters