* Sterling gains vs under-pressure euro * But fragile UK economy could limit sterling gains * Pound hits 2-month low vs broadly firmer dollar (Updates exchange rates, adds details) By Anirban Nag LONDON, Sept 9 (Reuters) - Sterling raced to a three and a half month high against the euro on Friday, as the single currency extended losses after the European Central Bank dumped its policy of rising interest rates and on reports a key ECB policymaker was quitting. ECB Executive Board Member Juergen Stark will step down from his post because of a conflict over the central bank's controversial bond-buying programme, sources told Reuters. His departure will highlight how divided the ECB governing council is over the crucial question of providing support to troubled euro zone debtors. . Analysts said concerns about a deepening euro zone debt crisis would underpin sterling against the euro, but a fragile UK economy and the risk of more stimulus by the Bank of England are seen limiting gains and keeping it weak versus the dollar. The euro fell to 86.22 pence, down 0.8 percent on the day, and its lowest level since May 27. It fell past stops below 86.40 pence and has broken below its 200-day moving average which comes in at 86.939 pence, leaving it vulnerable to a test of the May 26 low of 86.11. The euro has not closed below its 200-day moving average since February. "The euro has been under pressure with investors taking their cue from interest rate futures which are biased towards a dovish policy from the ECB," said Jeremy Stretch, head of currency strategy at CIBC World Markets. "There is talk that Stark is leaving and stock futures are all pointing lower. Right now a flight to safety is a flight away from the euro." This was the second straight session that the pound has gained against the euro. On Thursday, it rose on relief that the BoE held back from adopting more quantitative easing, as some in the market had positioned for. SHAKY STERLING Against the dollar, sterling was down 0.4 percent at $1.5893 , having fallen to a low of $1.5882, its weakest since July 12. Traders said losses accelerated after stop loss orders were triggered on the break below $1.5920. They reported bids around $1.5800, though a fall below that level would leave the July low of $1.5781 in view. "Sterling is shaky. The possibility of more quantitative easing in the UK has come back as a market risk and there is talk that the UK government's fiscal plan is too rigid, but sterling is still in a better position than the euro," said Audrey Childe-Freeman, currency strategist at JP Morgan Private Bank. In contrast, expectations of another round of quantitative easing in the U.S. are being scaled back with most expecting the Federal Reserve to opt for what has been dubbed 'Operation Twist'. In this it buys long-dated Treasuries to send yields lower, and offsets this by selling shorter maturities, keeping the balance sheet unchanged. This is likely to offer the greenback support in coming weeks. There was little market reaction to data showing UK factory gate inflation higher than expected in August despite a sharp fall on the month in input prices. Economists expect the BoE will need to see a marked fall in inflation before embarking on more QE. (Additional reporting by Jessica Mortimer; Editing by Ruth Pitchford)

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