(Reuters) - Sterling rose against the dollar on Friday, recovering from sharp losses the previous day as it tracked gains in the euro, though it remained vulnerable to worries about a fragile British economy. The pound was up 0.4 percent at $1.5581, rebounding from steep losses the previous day after the European Central Bank took no immediate action against soaring Spanish and Italian borrowing costs. FREE GUIDES AND REPORTS FROM DIANOMIADVERTISEMENT CFD Trading Seminar FREE CFD trading seminar from IG Markets Find out more Spanish and Italian government bond yields turned lower on Friday as markets speculated that the ECB may still intervene to reduce their sky-high borrowing costs. The pound shrugged off figures on Friday showing growth in Britain's dominant services sector slowed more than expected in July, casting doubt over whether the economy can rebound after three consecutive quarters of contraction. Traders said many in the market had feared an even worse result after an equivalent survey on manufacturing earlier this week showed that sector shrank at its fastest pace in nearly three years. "The PMI figure would have had to have been much lower to have had an impact on sterling," said Glenn Uniacke, a dealer at Moneycorp. The ECB said on Thursday it may resume its programme of buying the government bonds of indebted euro zone countries, though markets were disappointed by the conditions it set and by concerns about opposition from Germany. Although sterling rebounded it stayed well below a high of $1.5768 reached late last week. The market's focus is set to switch to the release of U.S. jobs figures at 01:30 p.m. british time, where a weak number would increase speculation that the Federal Reserve may be set to ease monetary policy further and hurt the dollar. UK ECONOMY The euro rose 0.3 percent against the pound to 78.75 pence, edging closer to a three-week high of 79.125 pence reached before the ECB meeting when the market was anticipating bold measures that did not materialise. Analysts expect the euro will edge lower against the pound, taking it back towards a near four-year low of 77.56 pence if worries deepen about debt problems in Spain and Italy. "Unless UK data massively disappoints the UK is still a comparable buy against the euro," Moneycorp's Uniacke said. Nevertheless, concerns about the UK have been growing since recent data showed the UK economy slumped in the second quarter, marking its third consecutive quarterly contraction. "The expectations are that the economy will rebound modestly in the third quarter but that doesn't change the picture of growth stagnating," said Lee Hardman, currency economist at BTMU. "A weak growth outlook and the likelihood of more monetary easing is still a negative for sterling." The Bank of England left interest rates and its quantitative easing target unchanged on Thursday but expectations are growing that the central bank will opt for further monetary easing in the coming months to aid a flagging economy.

Source