LONDON, July 2 - Sterling homed in on April's 26-year highs versus the dollar on Monday, moving above $2.01 with investors bolstered by prospects that the Bank of England will raise interest rates this week.

There was no discernible impact in the market so far from security alerts in Britain, where police hunted for accomplices of suspected militants who rammed a burning Jeep into a Scottish airport building over the weekend and tried to detonate two car bombs in central London last week.

British rate hike expectations got a sharp boost after minutes from last month's BoE rate meeting showed that four of its nine policymakers had voted for a yield-boosting rate hike, dissenting from June's on-hold decision.

Data on Britain's manufacturing sector is expected at 0830 GMT, and a strong showing would be expected to boost the pound even further.

With British interest rates currently at 5.5 percent, the highest in the G7, sterling has benefited from investors' penchant for carry trades, where they borrow cheaply using low-yielding currencies to buy higher return assets.

Traders said however that the pound could fall sharply if the BoE voted against another hike this week.

"Thursday (rate decision) is a big focus, it's almost fully priced in. The risk to sterling is probably one way...if the BoE don't go (for a hike) that would be a major surprise and would hurt sterling," Rabobank senior proprietary trader Lee Ferridge said.

By 0732 GMT, sterling had risen to a two-month high of $2.0114, moving further toward April's 26-year peaks hit at $2.0133. The euro was steady on the day at 67.41 pence.

British data on growth, mortgage lending and consumer confidence last Friday pointed to a reasonably buoyant economy, keeping intact expectations for a rate hike to 5.75 percent this week.

The market was unfazed by data earlier on Monday showing British house price inflation eased in June, with signs that the booming London market may also be starting to cool in response to higher interest rates.

Property consultants Hometrack said house prices rose 6.4 percent on the year in June, down from 6.7 percent in May. House prices rose just 0.3 percent on the month, half the rate of May's increase.

Fifty-six of the 70 economists polled by Reuters after the last set of BOE minutes forecast a July rate hike with the rest choosing August.

Source supplied by: Reuters