* Sterling falls after UK manufacturing PMI disappoints * Euro/sterling rises, but more gains depend on ECB * U.S. firm downgrades UK growth forecasts By Anirban Nag LONDON, Aug 1 (Reuters) - Sterling fell to a two-week low against the euro and dropped against the dollar on Wednesday after the UK manufacturing sector contracted more than expected, keeping alive the chances of more monetary easing by the Bank of England. Sterling fell to a session low of $1.5620 from around $1.5680 before the purchasing managers data was released while the euro climbed to 78.75 pence its highest level since mid-July and up from around 78.60 pence beforehand. The data showed Britain's manufacturing sector shrank at its fastest rate in more than three years in July, dealing a blow to hopes the country may come out of recession over the summer. It came just hours after soft housing sector numbers and added pressure on sterling, traders said. Data from Nationwide showed British house prices fell at their fastest annual pace in nearly three years last month. The euro was also supported by lingering hopes that the European Central Bank could take bold action to tackle the euro zone debt crisis this week, despite strong German opposition to the bank buying government debt in the secondary market to lower Spanish and Italian borrowing costs. "The PMI numbers were awful and sterling got hit by that," said Richard Driver, currency strategist at Caxton FX. "But against the euro, we expect sterling's losses to be temporary as the common currency's rally will fade. I think the market is in for a disappointment, both from the ECB and the Fed." Analysts said most currencies were likely to trade in a tight range ahead of the ECB decision on Thursday. The meeting is expected to overshadow decisions by the Bank of England and the Federal Reserve after last week's pledge by President Mario Draghi to do "whatever it takes" to protect the euro. If the ECB delivers bold measures, it could boost investor appetite for taking on risk, helping sterling against the dollar, but if it disappoints it could lead to sharp falls in currencies perceived as higher-risk. The euro is also likely to weaken in that case. Traders are also mindful of the UK's close trading ties with the euro zone and its vulnerability to economic and debt problems in the region, as suggested by data last week showing a sharp contraction in the UK economy in the second quarter. Morgan Stanley revised their UK growth forecasts lower, just a few days after revising down their euro-area forecasts. "Growth is now expected at -0.5 percent in 2012 and 1 percent in 2013, (down) from +0.5 percent and +1.8 percent previously. We expect the BoE to have to do more quantitative easing to the tune of 100 billion pounds by first quarter 2013 and (lower rates) by 25bps by end of the year," the firm said. The BoE is widely expected to leave policy unchanged on Thursday while the Federal Reserve is likely to show on Wednesday it is ready to act against a weakening U.S. recovery, but stop short of aggressive easing measures for now. (Reporting by Anirban Nag; Editing by Toby Chopra)

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