By Jessica Mortimer
LONDON, May 3 (Reuters) - Sterling hovered just shy of a 22-month high against the euro on Thursday as a services sector survey left the impression that the UK economy was in better shape than the euro zone even though the result was weaker than expected.
Investors kept buying the pound as an alternative to the common currency, which is saddled with a drawn-out debt crisis, and analysts expected sterling to continue its broad ascent.
Britain's dominant service sector grew more slowly than expected in April, a purchasing managers' survey showed, although firms' optimism rose to a two-year high and hiring picked up pace.
The euro was at 81.14 pence and very close to matching a low of 81.13 pence hit on Wednesday, which marked its weakest level since June 2010. It quickly resumed falls after gaining briefly in the wake of the UK PMI data.
"It remains the case that there appears to be underlying demand for the pound which isn't shaken by domestic economic factors," said Michael Derks, chief strategist at FXPro.
"There is still a general distrust of the euro, and the pound is benefiting from that through investor appetite for UK assets, especially gilts and central London property."
Further gains would see sterling target the 2010 high of 80.67 pence per euro, beyond which would mark levels not seen since the aftermath of the collapse of Lehman Brothers in 2008.
Derks said he expected sterling to reach 80 pence per euro by the end of the second quarter.
The UK services PMI index fell to 53.3 in April from 55.3 in March, below forecasts for a smaller drop to 54.2, and followed weaker manufacturing and construction PMI earlier this week.
However, the sectors remained in expansionary territory and continued to suggest the UK economy is faring much better than the euro zone, with manufacturing PMI data for the region on Wednesday revealing a much deeper-than-expected contraction.
"The recession in the euro zone is deepening. Euro/sterling has definitely got further to fall," said Richard Driver, analyst at Caxton FX.
The common currency was broadly weak before a European Central Bank decision and news conference, which is likely to strike a dovish tone on the euro zone's growth outlook. It was also pressured after a sale of Spain sold 3- and 5-year bonds but at a cost of much higher yields.
The ECB is widely expected to keep interest rates on hold when it announces its decision at 1145 GMT. The news conference is due at 1230 GMT.
Against a trade-weighted basket of currencies, sterling
was at 83.5, according to Bank of England data, just shy of its recent 32-month high of 83.6.
Sterling has performed well since Bank of England minutes for April suggested chances were lessening that the central bank will opt for more asset purchases under its quantitative easing programme, given policymakers' concerns about high inflation.
BoE governor Mervyn King echoed that tone in an interview with BBC radio on Thursday, saying inflation was still too high and that the economy looked set to recover slowly this year despite a weak start.
Economic concerns remained, however. A survey by mortgage lender Nationwide on Thursday showed British house prices fell in April by 0.2 percent, confounding expectations for a 0.5 percent rise.
Against the dollar sterling dipped 0.1 percent to $1.6181, taking it well below an 8-month high of $1.6304 hit on Monday, with analysts saying $1.63 was likely to prove a stiff hurdle to break.
Below $1.6153 would mark a one-week low and traders cited talk of stop loss sell orders below $1.6150.
Local elections take place in Britain on Thursday where voters may voice discontent with the current Conservative-led coalition government and its austerity measures designed to bring down the country's deficit.
(Editing by Hugh Lawson)
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