LONDON, Nov 14 (Reuters) -

British government bond prices fell sharply on Friday,

stocks, particularly banks tumbled, and sterling hit its lowest

level on the euro in over two years, following new reports that

the UK budget later this month will not see expected income tax

rises.

Britain's 10 year government bond yield rose 10 basis points

to 4.54%, set for its biggest one-day jump since early July. In

contrast, equivalent German government bond yields were up just

2 bps.

Bond yields move inversely to prices.

The Financial Times reported Thursday, citing officials

briefed on the decision that British Prime Minister Keir Starmer

and finance minister Rachel Reeves have abandoned plans to raise

income tax rates, changing course just weeks before a key

November 26 budget.

That report comes as Starmer's authority within his own

ruling party comes under increasing strain.

Britain's blue-chip FTSE index shed over 1%,

with bank stocks such as Barclays Lloyds and

Natwest falling over 3% each.

Traders said if Reeves did not raise income tax, higher

taxes on banks may be needed to fill a fiscal hole.

The pound dropped nearly 0.5% on the dollar to $1.3129 and

weakened sharply on the euro, with the common currency hitting

88.64 pence, its highest since April 2023.

It is typical for higher bond yields to send a country's

currency higher but on several occasions this year, worries

about Britain's fiscal position have seen government bonds and

sterling sell off together.

"Clearly, the market had been hoping the government

would take steps to deal with its fiscal shortfall and that

would mean a rise in income tax," said Jeremy Stretch, head of

G10 FX Strategy at CIBC Markets:

"Now if the FT report is correct, then that confidence

in its attempts to improve the fiscal position is going to be

shaken.

"So, what we're seeing is a lack of confidence from

markets and especially the bond markets," he added.