By Jessica Mortimer LONDON, Oct 9 (Reuters) - Sterling fell to a one-month low against the dollar on Tuesday after weak UK manufacturing and trade data led investors to question whether the economy recovered much in the third quarter. A weak economy increases the risk that the Bank of England will opt to print more cash under its quantitative easing programme next month. That could leave the pound vulnerable to more falls. Sterling fell 0.2 percent to $1.5991, its weakest since Sept. 11. That took it well below a peak of $1.6310 hit in late September when improvements in UK data stoked optimism the economy would recover in the final three months of the year. Economists' forecasts for the economy have worsened steadily this year and the third quarter is expected to show only very modest growth. "The trade balance and industrial production suggest that the economy may have struggled to recover in the third quarter. The hope previously was that we would get a more decent rebound in GDP after the contraction in the second quarter," said Valentin Marinov, currency strategist at Citi. Further weakness could see the pound fall towards the Sept. 10 low of $1.5960 and the 55-day moving average of $1.5905. Manufacturing output dropped 1.1 percent in August after a downwardly revised bounce of 3.1 percent in July, while Britain's goods trade deficit widened to 9.8 billion pounds as exports fell and oil imports rose. The data came after the International Monetary Fund slashed its forecasts to show the UK economy shrinking overall this year. Citi's Marinov said optimism for a recovery had led to a build-up of "substantial" long sterling positions, or bets on the currency rising, some of which were now being unwound. But the pound rose against the euro, which was hampered by uncertainty over when Spain may seek aid and the lack of progress in talks on getting Greece back on track with its bailout programme. The euro was last down 0.4 percent at 80.59 pence, though it remained not far from a three-week high of 81.00 reached on Monday. The single currency faces strong chart resistance at the mid-September peak of 81.14 pence and the 200-day moving average at 81.18 pence. FISCAL OUTLOOK As well as the risk of more QE from the BoE, weak data will increase concerns that the government will fail to deliver on its plans for cutting the deficit. This would raise the risk of the UK losing its prized AAA credit rating. The government, steadfast in its ambition to cut a record budget deficit but under pressure to fix a recession-hit economy, abandoned its original deficit reduction targets last year and could be forced to extend them again. But Prime Minister David Cameron said on Tuesday he would not soften his austerity programme with a "Plan B" of slower spending cuts. "The question is does the UK come out of recession fast enough so that the fiscal path is not being questioned," said Audrey Childe-Freeman, head of foreign exchange strategy at BMO Capital Markets. "That's the most crucial factor for the longer-term outlook for sterling, the market is questioning it and that's why sterling is shaky." Following the release of the manufacturing and trade data, the BMO said it is looking to enter a long position in the euro against the pound at current levels, around 80.73 pence, with an initial take-profit target of 81.50 and a stop loss at 79.75. However, some analysts were wary of how much more the euro could gain, especially as not all the news out of the UK has been bad. Surveys overnight showed some improvement in UK retail sales and the housing market. "Euro rallies up to the 200-day moving average are probably worth fading," said Jeremy Stretch, head of currency strategy at CIBC.

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