* Bank of England starts two-day policy meeting By Jan Harvey LONDON, Oct 3 (Reuters) - Sterling hit a three-week low against the dollar and its weakest in nearly two weeks versus the euro on Wednesday, as soft economic data eroded confidence in the prospect of a sustained recovery in the UK economy. A report on Wednesday showed Britain's service sector growth slowed in September and services providers shed jobs for the first time in 10 months. The data which came a day after a weak construction sector activity report is likely to see investors add to short positions against sterling in the near term, traders said. Sterling was down 0.2 percent against the dollar at $1.6095, having earlier fallen to a low of $1.6085. The pound remains on a broad downtrend versus the dollar since hitting a 13-month peak of $1.6310 on Sept. 21. Traders cite support at its Sept. 13 low of $1.6071. "Sterling maybe got a bit over-ambitious against the dollar, but I still think it's going to be stronger versus the euro going forward," said Saxo Bank forex strategist John Hardy. "There are still plenty of open questions about the euro." The euro was slightly higher at 80.15 pence. Earlier it hit a peak of 80.245 pence, its highest since Sept. 20, and was on track to rise for a fourth straight day. Sterling has come under pressure against the single currency as softer-than-expected economic data this week highlighted the fragility of the UK economy, while speculation that Spain will seek a bailout soon helped the euro. A composite of this week's data releases suggested the UK economy grew only marginally in the third quarter. While UK construction activity fell for a second month in September, a Nationwide survey revealed a drop in house prices. On Monday, manufacturing PMI and mortgage lending data missed expectations. Britain's economy shrank by 0.7 percent in the second quarter of 2012, extending a recession that started late last year as output wilts under the pressure of government austerity and the euro zone debt crisis. "If the global economy loses any more momentum, there will be more concerns about the UK's creditworthiness and ability to finance a huge current account deficit with massively negative real yields," Societe Generale currency strategist Kit Juckes said. A Reuters poll on Wednesday showed the median outlook for sterling is stable, with the pound seen at $1.61 in one month's time, and then $1.59 in six and 12 months. Median forecasts were revised up from a September poll. But analysts do not expect it to stage a sharp bounce as expectations the Bank of England could step in to provide additional stimulus in coming months remain strong. The BoE's monetary policy committee started a two-day meeting on Wednesday, at which it is expected to decide to hold off on an extension of its government bond-buying programme for at least another month. "We expect the BoE to remain on hold at Thursday's Monetary Policy Committee meeting and that we will have to wait until the November meeting for further easing," Danske Bank said in a note on Wednesday. "As the UK economy is expected to remain in recession in Q4, we expect another round of quantitative easing of 50 billion pounds to be announced at the November meeting, despite the fact that a few MPC members (Spencer Dale and Ben Broadbent) previously raised doubts over the effectiveness of QE."

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