LONDON, Nov 9 (Reuters) - Sterling fell against the dollar on Friday, retreating from 26-year highs as problems afflicting financial institutions saw risk aversion soar and investors move out of risky carry trades.

The pound weakened as Barclays shares fell by as much as 9 percent on talk -- later denied by the bank -- that it faced $10 billion in credit losses.

U.S. bank Wachovia warned of increased loan losses and a report from Standard & Poors that the trustee of a $1.5 billion collateralised debt obligation managed by State Street Global Advisors had started selling assets, added to investor jitters.

"There has been a global risk aversion trade with more equity weakness and investors have unwound short dollar positions," said Laura Ambroseno, cuurency strategist at Morgan Stanley.

By 1401 GMT, the pound had fallen 0.5 percent on the day versus the dollar to trade at $2.0972, after earlier reaching as high as $2.1161.

The euro was up 0.6 percent against sterling at 69.97 pence.

The pound came under domestic pressure earlier on Friday after the Office of National Statistics released data showing Britain's goods trade deficit with the rest of the world hit a record high in September.

Source supplied by Reuters