(Adds quotes, more details of BoE decision)

By Alun John

Aug 7 (Reuters) -

The pound rallied and UK stocks and bond prices tumbled on

Thursday after the

Bank of England cut interest rates

as expected, although concern over inflation among its

policymakers stirred up unprecedented division.

Four of the BoE's nine policymakers voted to keep rates

on hold, after the Monetary Policy Committee had to have two

rate votes for the first time in its history.

The BoE is being pulled in different directions as

Britain's job market has weakened in recent months, but

inflation is rising.

The vote split suggests that more policymakers are

prioritising the inflation side of that equation than investors

had thought prior to the meeting, something that could cause

them to pare back bets on further easing.

The pound rose as much as 0.6% to a session

high of $1.343, before retreating to $1.3407, up 0.4% on the

day.

Yields on UK government bonds, or gilts, rose, as

traders reassessed how much more the BoE will cut rates this

year.

The benchmark 10-year yield at one point rose over 6

basis points at 4.597%, and was last at 4.58%. Rate-sensitive

two-year yields were up to 3.89%.

"Essentially the committee collectively is more

concerned with the pace of disinflation, and that resulted in

less willingness to cut rates across members than we had

believed," said Philip Shaw, chief economist at Investec.

"We are still for now forecasting a 25 bps cut to rates

in November, but clearly we could be looking at another very

finely balanced decision and the outturn will of course depend

on the data between then and now. "

London's blue chip FTSE 100 index extended an

earlier loss, and was last down 0.8%, with the mid cap FTSE250

index giving back earlier gains to trade just below flat.

The broad European benchmark was up nearly 1%.

"Going forward, further disagreements should be

anticipated as members' positions become increasingly

entrenched, reflecting the increasing divergence of key data

points," Jeremy Batstone-Carr, a strategist at Raymond James

Investment Services, said, calling the rate decision

"razor-edged".

(Additional reporting by Stefano Rebaudo and Danilo Masoni in

Milan and Lucy Raitano in London; editing by Amanda Cooper and

Ed Osmond)