* Sterling hits session low vs dollar after euro stumbles on German comments
* Pound reverses earlier gains, EUR/GBP pulls back from five-week high
* Investors await UK inflation, retail sales data, BoE minutes
By Naomi Tajitsu
LONDON, Oct 17 (Reuters) - Sterling slipped against the dollar on Monday, tracking losses in the euro after comments from German officials tempered optimism that a European Union summit this week will produce a comprehensive plan to tackle the euro zone debt crisis.
Comments from German Finance Minister Wolfgang Schaeuble that Sunday's summit of EU leaders will not present a final solution for the region's debt problems lifted the pound from a five-week low versus the single currency.
The pound relinquished early gains versus the dollar as the comments from Schaeuble and other German government officials prompted investors to pick up the dollar, which is considered to be a relatively safe bet in times of uncertainty.
This put the brakes on a rally in the pound, which gained last week as investors cut back on bets the UK currency will depreciate. The move had enabled sterling to recover from losses made after the Bank of England announced earlier this month a second round of quantitative easing to help the weak economy.
Analysts said the pound would take its cues from external factors ahead of the meeting of EU leaders in Brussels.
"International developments, and in particular what's going on with the euro zone, will be the predominant driver of sterling direction this week, rather than domestic issues," said Michael Derks, chief strategist at FX Pro.
"At the end of the day, sterling doesn't have wonderful fundamentals to recommend it, although a lot of major currencies don't either," Derks said.
He added that domestic factors, including weak UK economic fundamentals and loose monetary policy conditions, might deter investors may keep from aggressively picking up the pound.
Sterling fell to a session low of $1.5743, retreating from the day's high of $1.5850 and pulling away from $1.5853 hit on Friday, its strongest level in a month.
Sterling had been supported by guarded optimism that European officials could announce a decisive plan to solve the region's debt crisis, which had boosted the euro and other currencies perceived to be higher risk.
But analysts argue that recent strength in the pound is unsustainable given weakness in the UK economy, which prompted the BoE to add 75 billion pounds to its 200 billion pound asset-buying programme earlier this month.
The euro was barely changed on the day at 87.65 pence, retreating from a five-week high of 87.97 pence hit in earlier trade.
The single currency headed lower, unable to hold above 87.90 pence, around its 100-day moving average, which has been a technical resistance level since early September.
RALLY STALLS
Sterling rallied last week as investors trimmed short positions -- bets that the UK currency will depreciate -- which had been piling up in past weeks.
The latest IMM positioning data shows a slide in net short sterling positions to 61,972 last week from 68,724 the previous week.
Highlighting weakness in the UK economy, the ITEM Club on Monday downgraded its 2011 GDP expectation to 0.9 percent from 1.4 percent predicted three months ago, while it also cut its forecast for 2012.
Investors await data on UK inflation and retail sales later this week, which are expected to show the economy's recovery remains frail, and may add some downside pressure to sterling.
They also anticipate the release on Wednesday of BoE minutes from its meeting earlier this month, to see how united the central bank was in coming to its decision to implement more QE.
Some analysts argued that this week's data may have limited impact on sterling given that the UK central bank has already moved to bolster the economy with more quantitative easing, which involves flooding the market with pounds and thereby decreasing demand for the currency.
"Now that QE2 is already announced, it is questionable how much traction this (week's) data could actually have," analysts at Credit Agricole CIB said in a note.
