LONDON, May 14 (Reuters) - Sterling dropped on Thursday,

while UK government bonds held on to their price gains, as a

political crisis in the UK escalated with the resignation of

health minister Wes Streeting turning up the heat on Prime

Minister Keir Starmer.

Starmer is under pressure to resign over hefty losses for

the ruling Labour party in last week's local elections.

Sterling fell as much as 0.2% to $1.3502, having

traded around $1.351 prior to the news. It was last at $1.3518.

The pound weakened to 86.68 pence per euro, from

86.66 earlier.

Britain's 10-year UK gilt yield was down 4.2

basis points on the day at 5.026%, from around 5.05% earlier on,

while London's blue-chip FTSE stock index was last up

0.38%.

"The big question is that the markets want to know how does

this leave the direction of fiscal policy. It certainly opens up

a huge amount of uncertainty, but we honestly don't know yet,"

Investec chief economist Philip Shaw said.

"At the moment, there are a lot of questions, not a whole

lot of answers."