Jan 14 (Reuters) - The British pound was poised to

record a sixth consecutive day of decline against the dollar on

Tuesday and hit a fresh 2-1/2-month low versus the euro as

concerns about Britain's fiscal sustainability continued to

weigh.

Heavy government bond supply has put pressure on British

asset prices, while inflation concerns have driven bond yields

higher on both sides of the Atlantic.

Investors will closely watch U.S. inflation readings, which

could provide further clues on how stubborn U.S. price pressures

are. Producer price figures are due later on Tuesday, with

consumer prices on Wednesday.

The dollar hovered near its highest level in over two years

as traders scaled back wagers on U.S. rate cuts in 2025 after

strong economic data.

The British currency dropped 0.2% to $1.2175. It

hit $1.2097 on Monday, its lowest level since November 2023.

Yields on 10-year gilts dropped one basis point

to 4.88% after jumping last week amid worries about the

government's plans to sell more debt and inflationary pressures

in the United States.

UK consumer price figures, due on Wednesday, will also be in

the spotlight. Analysts argued that sticky inflation could lead

investors to price in less Bank of England (BoE) rate cuts in a

move which could spell more trouble for the UK market.

Higher yields usually reflect a strong economy and attract

capital inflows, strengthening the currency. In this case, they

may force the government to cut fiscal spending to meet its

fiscal rules, potentially weighing on future growth.

Britain's finance ministry said last week it would maintain

"an iron grip" on public finances in response to a two-day

selloff in debt markets.

"But the UK economy is weak, persistent inflation keeps

monetary policy excessively tight, while higher yields squeeze

the government's fiscal policy space," said Paul Mackel, global

head of forex research at HSBC, arguing that these themes will

continue to swirl and leave the pound exposed.

The single currency rose 0.4% to 84.26 pence, its

highest level since Nov. 1.

Analysts pointed out that UK budget constraints include a

stability rule, whereby day-to-day spending must be matched by

revenues and an investment rule that public sector net financial

liabilities will decline as a proportion of gross domestic

product (GDP).

Investors will closely watch the outcome of a

4-billion-pound auction of 10-year gilts on Wednesday to gauge

investor demand.