The pound clawed back early losses against the weakened dollar after Chancellor Angela Merkel and France's President Nicolas Sarkozy said they were united in their support for debt aid to Greece.

The pound recovered from a session trough versus the dollar, but it hovered within range of a three-week low and its upside was limited due to the conviction that UK interest rates will stay low while the economy struggles to recover.

Analysts said risk-averse investors would continue to sell the pound, while the view the Bank of England will hold rates at a record low 0.5 percent for months to come would keep sentiment negative.

"The pound is fortunate that the spotlight is on the euro at the moment, because the economic news from the UK has been truly awful," said Michael Derks, strategist at FXPro.

"If it wasn't for the focus on Greece and the euro zone, there's every chance sterling would be weaker."

The euro rose 0.4 percent to a session high of 88.33 pence.

It bounced back from a two-week low of 87.21 pence hit on Thursday, but analysts said it could fall towards 84 pence, a level last seen in February, in the near-term if European officials are unable to reach a solid agreement on Greek debt aid soon.

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Danske currency analyst John Hydeskov argued the risk of a fall below that was limited given that the euro will gain some support from its growing rate advantage against sterling.

The European Central Bank is expected to raise interest rates to 1.5 percent next month while short-term rate markets are pricing in a first rise in UK rates only in mid-2012.

Sterling was little changed on the day versus the dollar at $1.6180, recovering from a session low of $1.6094.

But the pound remained within sight of Thursday's low of $1.6078 -- its weakest level since late May -- reached after a fall in UK retail sales that was the latest in a string of dismal economic data.

Sterling has retreated steadily from the mid-$1.64 region this week, tracking a fall in the euro versus the dollar as investors became more concerned about disagreements among European officials over a debt bailout for Greece.

Many in the market expect sterling to stay weak versus the dollar, but some analysts saw the possibility of a near-term correction given the scope of the pound's fall this week.

"With solid support around the $1.6000 area and the swiftness of the move from $1.6400 over the past two days the potential for a short squeeze remains quite high," CMC analysts said in a note.

Technical support for the pound was seen at $1.6018, its 200-day moving average. The pound has traded well above the average all year, but a break below that level may pave the way for deeper losses.

Copyright Reuters, 2011