LONDON, Oct. 12 (Reuters) - Sterling hit a two-week low against a basket of currencies on Friday after weak housing data in the previous session were deemed to have increased the prospect of interest rate cuts from the Bank of England.

In the absence of first tier UK economic data on Friday, investors retrenched positions ahead of U.S. retail sales numbers that will be scrutinised for clues on the Federal Reserve's next move.

"The pound is responding to ... a slow down in the housing market and a potential cut in rates," said Adrian Schmidt, currency strategist at RBS Global Banking.

At 0742 GMT, the pound was down 0.3 percent versus the dollar at $2.0260 <GBP=>. Against the yen, it was down 0.4 percent to 237.61 <GBPJPY=R>.

On the Bank of England's trade-weighted basis, sterling opened at a 2-week low of 101.90 <=GBP>, closing in on a 14-month trough of 101.4 struck at the end of September.

The euro rose 0.3 percent to 70.07 pence, its highest level in two weeks <EURGBP=>. Analysts said the pair was benefiting from merger and acquisition flows related to a team led by British bank RBS winning the takeover battle for Dutch ABN Amro.

Market expectations for UK rate cuts fell earlier in the week when Bank of England Governor Mervyn King said Britain's economy would need to slow over the coming year to keep inflation risks at bay.

But data showing UK house prices fell at their fastest rate in two years revived expectations that rates -- the highest in the Group of Seven industrialised nations at 5.75 percent -- may be cut.

Source supplied by: Reuters