The pound strengthened for a third day against the dollar after a government report showed the nation’s budget deficit narrowed in September more than economists forecast. Sterling appreciated versus all but one of its 16 major counterparts as U.K stocks were boosted amid optimism European policy makers are moving closer to agreement on a plan to help contain the region’s debt crisis. U.K. government bonds fell. “The pound is trading stronger since the release of the public borrowing figures this morning, which proved encouraging,” Neil Jones, London-based head of European hedge- fund sales at Mizuho Corporate Bank Ltd., a unit of Japan’s third-largest bank, wrote in an e-mailed note. The pound rose 0.7 percent to $1.5898 as of 12:50 p.m. in London, poised for gain of 0.5 percent this week. The currency climbed 0.6 percent to 121.99 yen, and appreciated 0.5 percent to 86.87 per euro. The U.K.’s net borrowing excluding support for banks fell to 14.1 billion pounds from 15.4 billion pounds a year earlier, the Office for National Statistics said today in London. A shortfall of 15 billion pounds was predicted by economists in a Bloomberg News survey. Revenue rose 4.2 percent and spending climbed just 0.5 percent. The pound has advanced 1.4 percent in the past month and 1.8 percent over the previous quarter, according to Bloomberg Correlation-Weighted Indexes, which measure a basket of 10 developed-market currencies. The currency rallied even after a gauge of British consumer sentiment slipped for a fourth month. Nationwide Building Society said its sentiment index dropped to 45 in September, the lowest since April, from 48 the previous month. Gilts Fall Gilts dropped as stock gains damped demand for safer investments. The FTSE 100 Index added 1.43 percent and the Stoxx Europe 600 Index climbed 1.7 percent. The 10-year yield rose eight basis points, or 0.08 percentage point, to 2.54 percent. The 3.75 percent security due September 2021 dropped 0.785, or 7.85 pounds per 1,000-pound face amount, to 110.525. European governments may unleash as much as 940 billion euros ($1.3 trillion) to fight the debt crisis, seeking to break a deadlock between Germany and France that is forcing leaders to hold two summits within four days, people familiar with the discussions said. U.K. government debt has returned 12 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 7.2 percent and Treasuries rose 7.9 percent. To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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