Sterling hit fresh record lows versus a broadly strong euro on Friday after a report of easing UK house price inflation firmed expectations of near-term interest rate cuts.

The Nationwide building society said house prices fell 0.5 percent on the month in December, posting their second straight monthly decline. The annual rate of house price growth cooled to 4.8 percent, its lowest since May 2006 and down from 6.9 percent in November.

Such data leaves the door open for the Bank of England to follow this month's unanimous vote for a rate cut to 5.50 percent with another move in early 2008, perhaps even as soon as January.

"All this really does is add to the general sense that sterling is living on borrowed time," said Simon Derrick, head of currency research at Bank of New York Mellon.

He noted that short sterling futures are pricing in around 75 basis points worth of UK rates cuts in 2008, compared to prospects for a hike in the euro zone.

"In the circumstances it seems to me that the pressure on sterling will continue to build, because it is the most interest rate sensitive of all the (major) currencies," he said.

The euro rose to 73.42 pence, the highest in its 8-year history.

However the pound managed to hold its own versus the dollar, with the U.S. currency coming under pressure from weak durable goods data and the increase in risk aversion following Thursday's assassination of Pakistani opposition leader Benazir Bhutto.

This has plunged nuclear-armed Pakistan into one of the worst crises in its 60-year history and fuelled geopolitical uncertainty leading investors to exit risky positions like the carry trade.

Source supplied by Reuters