* Sterling falls to lowest since March vs dollar * Greek, Spanish concerns fan risk aversion, USD demand * Pound struggles vs euro after dovish BoE By Nia Williams LONDON, May 17 (Reuters) - Sterling hit a 1-1/2 month low versus the safe haven dollar on Thursday on worries about Greece and fragility in the Spanish banking sector, with investors also bearish on the pound after the Bank of England cut UK growth forecasts. The pound also fell against the euro, which underperformed most other currencies as market players fretted over the risk that more euro debtor governments could be drawn deeper into the crisis. Analysts said sterling could weaken further against the dollar after the BoE's Inflation Report on Wednesday painted a gloomy outlook for the UK economy and left the door open for another round of asset buying. Sterling tumbled 0.65 percent to a session trough of $1.5879, its lowest level since March 22, and the largest daily percentage fall in over a month. Selling accelerated on the break of the 100- and 200-day moving averages at $1.5826. The pound later pared losses to trade at $1.5834 after the Federal Reserve Bank of Philadelphia's business activity index came in weaker than expected for May. "It was a little bit disappointing that (BoE governor) Mervyn King was not more clear about how he intends to help the UK out of recession, we are seeing a reaction to that today," said John Hydeskov, chief analyst at Danske Markets. The BoE Inflation Report warned of risks to the UK from the euro zone crisis and downgraded medium-term inflation forecasts, which could be used to justify printing more money to buy bonds, seen as negative for a currency. But in an interview on Thursday BoE policymaker Paul Fisher said the central bank should only do further quantitative easing asset purchases if the economy seems to be slipping into a deep recession, which does not appear to be the case. DECLINE VS DOLLAR EYED Danske Bank's Hydeskov said the dovish Inflation Report helped relative rates rise slightly in favour of the euro , which climbed 0.5 percent to 80.27 pence. It moved away from a 3-1/2 year low of 79.50 pence hit on Wednesday, although many market players said that level could be tested again if political turmoil in Greece fuels more demand for alternatives to the common currency. Greece faces fresh elections on June 17 that may give power to parties opposed to austerity and Spanish bond yields rose on Thursday as shares in partially nationalised lender Bankia SA plunged. A further deterioration in investor confidence would be likely to boost demand for highly liquid U.S. dollars, pushing sterling towards the March lows around $1.56. "Sterling is going to come under pressure against the dollar, which will continue to be the ultimate safe haven in the current environment," said Ian Stannard, European head of FX strategy at Morgan Stanley. (Editing by Ruth Pitchford)

Source