LONDON, Oct 2 (Reuters) - Sterling eased against a broadly firmer dollar on Tuesday as investors remained cautious of buying the British currency amid worries about the health of the banking sector and possible interest rate cuts in coming months.

Troubles at UK mortgage lender Northern Rock and the big contribution that Britain's finance sector makes to the broader economy have made sterling vulnerable to bad news from banks -- such as statements from UBS, Citigroup and Credit Suisse that their profits will be hit by the credit market squeeze.

Although equity markets remained resilient in the face of the news in forex markets it gave some investors an excuse to take profits on riskier but potentially more rewarding carry trades, where purchases of high yielders like sterling or the New Zealand dollar are funded by borrowing in low yielding currencies such as the yen.

"Sterling has come off slightly and carry trade generally came off overnight which could be linked to the UBS and Citigroup results," Paul Robinson, currency strategist at Barclays Capital.

"Although it's worth noting that the equity indices have done just fine, nonetheless sterling is vulnerable to the global financial sector slowdown so bad news in the financial sector is bad news for sterling."

By 0717 GMT sterling was down 0.2 percent at $2.0398 <GBP=>, about a cent below Monday's two-month highs.

It lost 0.5 percent versus the yen to 235.49 <GBPJPY=R>.

The euro was steady at 69.57 pence <EURGBP=>.

With no first tier UK data due on Tuesday investors are looking ahead to the Bank of England's interest rate decision on Thursday, with a Reuters poll giving a 15 percent chance of rates being cut from the current 5.75 percent.

An upbeat note about the British economy came from Tesco (TSCO.L: Quote, Profile , Research) as the world's third largest retailer reported a bigger-than-expected 3.5 percent rise in UK like-for-like sales excluding petrol in the 26 weeks to Aug. 25.

Source supplied by: Reuters