LONDON, Nov 29 - Sterling eased against the dollar and the euro on Thursday as data continued to paint a negative picture of the UK economy, underpinning expectations that the Bank of England could cut rates as early as next month.

The Nationwide building society said on Thursday that house prices in Britain fell in November for the first time since February last year and at their sharpest rate in more than twelve years.

This emboldened sterling sellers who have laid low this week as a slight return of risk appetite and policymaker comments indicated that a December rate cut might not be a done deal.

Last week they drove the pound down to a four and a half year low against the euro.

"As far as sterling is concerned the data is turning increasingly negative which is going to be a bearish factor over the medium term," said Ian Stannard, senior foreign exchange strategist at BNP Paribas.

"The house price data this morning is obviously much weaker than expected and we're likely to see some further negative news with data later in today -- the mortgage approvals."

At 0823 GMT the euro was up 0.2 percent at 71.42 pencewhile the pound was down 0.7 percent against the dollar at $2.0664.

Nationwide said the cost of an average home fell 0.8 percent this month -- the first decline since February 2006 and the biggest drop since June 1995 -- after a 1.1 percent rise in the previous month.

Economists also expect Bank of England data due at 0930 GMT to show approvals for house purchase fell to 97,000 in October from 102,000 in September.

Earlier on Thursday BoE policymaker David Blanchflower was quoted as saying rates should come down now so the Bank can get ahead of the curve, that is, cushion the hit to growth from the fallout of the credit crunch.

The pound is a key destination for the carry trade where investors borrow low yielding currencies like the yen to fund purchases of higher yielding assets. A rate from the current 5.75 percent would reduce its appeal.

BNP's Stannard added that sterling interbank rates have been pushing higher: "It's going to be interesting to see if the Bank of England reacts to that and starts to add liquidity.

"If we see that happening that's going to be another bearish factor for sterling ... and will increase speculation that the Bank of England is going to have to cut rates -- maybe as early as next month."

London interbank offered rates (Libor) benchmark lending rates between banks for two-month sterling rose to a two-month high of 6.63875 percent the previous session.

Source supplied by: Reuters