* UK borrowing costs rise as investors await new PM's first

decisions

* Key decision will be who Burnham picks as finance minister

* UK already grappling with high public debt, above target

inflation

* Pound has strengthened as relatively smooth political

transition removed some bets against UK currency

(Writes through, adds context and investor quotes, updates

prices)

By Sophie Kiderlin, Yoruk Bahceli and Naomi Rovnick

LONDON, July 20 (Reuters) - Benchmark British borrowing

costs edged higher on Monday, though sterling gained slightly,

as investors awaited Andy Burnham's first decisions as prime

minister including who he will choose as his finance minister.

Burnham, who will be Britain's seventh prime minister in a

decade, will face an array of challenges in his new role - from

a sluggish economy to worries about fiscal discipline and the

fallout from the war in the Middle East.

Yields on British government bonds, or gilts, are the

highest in the G7 group of advanced economies, and British

10-year borrowing costs hit an 18-year high in May as the Iran

war drove up energy costs.

That underscored fears about inflation around the world, and

particularly in Britain where it has long been above target.

High public debt, and the scars of the Liz Truss mini-budget

crisis in 2022, have also been weighing on bond prices and

keeping yields elevated.

The 10-year yield was last at 4.98%, below its May highs,

but up nearly 3 basis points on the day.

And investors remain nervous.

"I can't believe we've gone from this relatively long period

of stable leadership to this rapid change of prime minister that

gives no one that certainty for the longer term," said Oliver

Blackbourn, multi-asset manager at Janus Henderson.

Blackbourn said he had favoured gilts before Burnham won a

seat in parliament last month, propelling the then Greater

Manchester mayor towards becoming prime minister, but he had cut

his position since in case the new top team's policies increased

government borrowing.

FINANCE MINISTER CHOICE IN FOCUS

Investors could get some clues about Burnham's policy

platform on Monday from his choice of finance minister, known in

Britain as the chancellor.

British assets were supported last week by reports that he

would likely pick Shabana Mahmood, regarded as a centrist, as

his finance minister rather than a more left-leaning candidate,

as markets took this as a signal that Burnham does not plan to

ramp up spending as some investors had feared.

Though for some investors the choice is somewhat symbolic as

Burnham has already said he will stick to his predecessor, Keir

Starmer's commitments on taxation and public spending.

"A lot is made about the candidates for chancellorship, but

the fundamental point is the government's going to still have to

have some commitment to the underlying fiscal rules," said

Ranjiv Mann, lead portfolio manager at Allianz Global Investors.

"There (are) certain policy options the government may go

for from different candidates, maybe pushing the fiscal rules

towards more borrowing to invest on some of these big

infrastructure projects."

However, he added, "It's going to be very difficult for

(Burnham) to move from that straitjacket because, as we've seen

multiple times now over the last few years, bond investors in

the UK will certainly punish the UK government if they don't

stick to those rules."

THE POUND HAS BEEN STRENGTHENING

Unlike gilts, Britain's pound has been performing strongly

in recent weeks. It has strengthened on the euro for the past

four weeks, and on the dollar for the past three, partly helped

by the higher yields, and also as the relatively painless

political transition caused traders to remove some bets on pound

weakness.

It continued to edge firmer on Monday. It was last up 0.13%

on the dollar at $1.3469 and, was also stronger on the euro

which dropped 0.16% to 84.88 pence.

"I think there's actually quite a lot of good news priced

into UK asset prices at the moment," said Andrew Wishart, senior

UK economist at Berenberg.

"It's all suggesting that there's belief among investors

that the Bank of England is going to hit its inflation target

and the government is going to make the public finances

sustainable. The big question we've got now with Andy Burnham

coming in is are these things going to remain true," he said.