Sterling strengthened for a third straight day against the euro on Thursday, recovering from a record low on Monday as a slight return of investor confidence encouraged a move back into the high-yielding currency. But poor sentiment for the pound was reflected in sterling falling against the dollar in choppy conditions, as a gloomy outlook on the UK economy kept investors focused on prospects for more interest rate cuts from the current 5.25 percent.

"Risk appetite has come back, which is euro-negative and positive for the pound," said Geoff Kendrick, currency strategist at Westpac. "However I suspect that the ECB will remain hawkish while the Bank of England is seen cutting so this presents opportunities to buy euro/sterling."

By 0910 GMT the euro was down 0.1 percent against the pound at 78.80 pence, a penny off the record high of 79.82 pence set on Monday.

Sterling moved lower against the dollar in volatile early London trading with traders citing selling by a large UK clearer.

The pound was down 0.3 percent against a recovering dollar at $1.9830, well off a high of $2.0192 set last week.

The BoE aims to cut interest rates only gradually to cushion the blow from the credit crunch but may need to let the economy slow to curb inflation, central bank policymaker Paul Tucker said late on Wednesday.

Investors will look to UK CIPS/NTC Services PMI data for March for further clues on whether the BoE will cut rates next week or wait until May.

Sourced by Reuters.