LONDON, Nov 16 (Reuters) - Sterling enjoyed a small respite on Friday after hitting 4-1/2 year lows against the euro on Thursday, but sentiment remained negative as risk appetite waned and focus on the timing of a UK rate cut increased.

Trade-weighted sterling is down 2 percent this week -- its biggest fall since July 2003 -- after a dovish Bank of England report on Wednesday and weak retail sales data Thursday prompted speculation of an early rate cut with more to follow.

"We might have some consolidation over the next couple of days but we expect sterling to continue to weaken, especially against the euro," said Paul Robson at RBS Global Banking.

At 0847 GMT, the euro was steady against sterling at 71.51 pence, after the single currency rose as high as 71.66 pence the previous session -- its strongest since June 2003 and within a pence of record highs set 4-1/2 years ago.

Sterling was 0.2 percent weaker against the dollar at $2.0406, a near four-week low.

"Sterling is probably going to remain under pressure and two things are going drive this. One is that Bank of England is going to be cutting rates next year while the ECB continues to sound pretty hawkish," Robson said.

"And risk appetite looks like it's been on the back foot and sterling is expected to trade weakly along with the aussie and the kiwi if equity markets continue to perform softly."

European shares fell early on Friday as investors grew warier of the impact of the credit crunch on the global economy. Banks were the worst performing sector, echoing a slide in financial shares on Wall Street and in Asia overnight.

The FTSEurofirst 300 index of top European shares was down 0.7 percent.

Source Supplied by Reuters