By Jessica Mortimer
LONDON, April 26 (Reuters) - Sterling hit its highest level in more than seven months against a weaker dollar on Thursday after policymakers in the United States kept open the option of more monetary easing.
The U.S. mood outbalanced any residual concern about Britain entering recession.
The pound also matched a two-and-a-half-year high against a basket of currencies as it recovered from losses the previous day when data showed the UK economy contracted again in the first quarter of 2012.
Analysts said recent data and surveys have shown signs of improvement in the UK, limiting the impact of the recession news and keeping up sterling's popularity as an alternative to a troubled euro. A survey by lender Nationwide showed UK consumer confidence rose to a nine-month high in March.
Sterling rose to $1.6208 , its strongest since early September last year, before easing back to $1.6188.
"Sterling has shown a remarkable resilience, having more or less totally shrugged off the GDP numbers," said Richard Wiltshire, chief FX broker at ETX Capital.
"The feeling is that although the UK data was disappointing it will not hamper the medium term picture."
The dollar fell broadly after U.S. Federal Reserve Chairman Ben Bernanke said on Wednesday that the central bank may launch another round of bond purchases if the economy weakened.
The euro was flat for the day at 81.75 pence as it edged back towards its recent 20-month low of 81.43 pence after rising the previous day in the wake of the UK gross domestic product data.
Investors remained wary of the euro due to concerns about debt problems in Spain and other euro zone countries and political uncertainty in the Netherlands and France.
But traders reported option related euro demand and also corporate bids placed below 81.50, however, which may limit the euro's falls in the short term.
Sterling's trade-weighted index rose to 83.3 , matching a level hit on Tuesday which was its highest since August 2009.
Sterling has been performing well since Bank of England minutes last week reduced the chances of more monetary easing in the UK in May.
"A less dovish BoE continues to provide important support for sterling with the growing UK interest rate advantage against the U.S. and euro zone seemingly unharmed by the disappointing GDP data," said Valentin Marinov, head of European G10 FX Strategy at Citi.
Some analysts believe the UK economy is on the road to recovery and first quarter GDP figures may be revised up. Others, however, warn it remains fragile, particularly given its strong trading links to the euro zone and say this may limit the pound's scope for gains.
The prospect of more quantitative easing cannot be ruled out, with BoE Monetary Policy Committee member Martin Weale saying on Thursday that the GDP figures were a disappointment and strengthen the case for more QE.
A Confederation of British Industry retail sales survey on Thursday was mixed, showing UK retail sales fell slightly more than expected in April although stores reported the strongest outlook for more than a year.Additional reporting by Neal Armstrong.Editing by Jeremy Gaunt.)
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