By Neal Armstrong LONDON, Jan 20 (Reuters) - Sterling struck a two-week high against the dollar on Friday, boosted by improving sentiment towards riskier assets, but further gains were hampered by concerns over the fragile UK economy which may require more monetary stimulus. The euro eased from two-week highs versus the dollar as traders booked some profits on this week's rally, which in turn helped the pound to recover from earlier three-week lows against the single currency. "There's a general decent improvement in risk appetite this week and the safe-haven flight into dollars we saw at the end of 2011 is starting to unwind, which is helping sterling," said Michael Derks, chief strategist at FX Pro. Sterling rose to $1.5502, its highest since Jan. 6, before easing back to $1.5460 to trade down 0.2 percent on the day. Traders said stop-losses were still lurking above $1.5500, with resistance highlighted at $1.5604, the 55-day moving average. Speculation that foreign investment flows could rise also helped support the pound, with China's sovereign wealth fund taking a minority stake in Thames Water. Sterling initially lagged the euro. The pound slipped to a three-week low of 83.78 pence against the single currency before recovering to 83.50. Broad short covering has lifted the euro away from a 16-month low of 82.22 pence hit earlier this month. Traders reported option-related offers in the 83.80 region with resistance seen at 84.22, the late December high. RETAIL REBOUND UK retail sales rebounded strongly in December as shops slashed prices to tempt pre-Christmas shoppers, providing some relief at the end of a gloomy year, official data showed. Traders said the data had little effect on the pound as the recovery in spending was largely priced in, although the scale of discounting was a concern. "Given that we know there was very heavy and early price discounting, I would have expected more of a response, especially as we've seen reasonably strong growth in nominal sales as reported by the British Retail Consortium," said Brian Hilliard, economist at Societe Generale. Worries about the UK's outlook persist as austerity measures and spillover effects from the euro zone debt crisis hang over the economy, prompting speculation the Bank of England will announce more asset purchases, or quantitative easing (QE), as early as next month. Data released this week showed inflation fell sharply in December, news that will be welcomed by the BoE's Monetary Policy Committee, although at 4.2 percent it was still more than double the BoE's target. "The economy is once again flirting with recession. I'm not sure there'll be more QE in February but it definitely remains on the table," said Derks. Britain's economy is broadly flat and growth is likely to be volatile for much of 2012, Bank of England policymaker Ben Broadbent was quoted as saying on Friday. Preliminary UK GDP data for the fourth quarter of 2011 is expected to show a 0.1 percent contraction next Wednesday. Broadbent also said he expected inflation to keep falling and that recently announced cuts in gas prices should help at the margin. (Editing by Catherine Evans)

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