The pound also rallied versus the dollar, with traders citing solid demand from Middle Eastern names during the London trading session. Currency markets were thin as many market participants were on holiday ahead of the year-end season.

The euro fell 0.2 percent on the day to 83.59 pence, its lowest since February. Investors were negative on the euro after European Central Bank President Mario Draghi on Monday suggested the central bank was not ready to provide aggressive support to struggling euro zone countries.

Traders said the pound's gains versus the euro mainly reflected continuing worries following a European Union summit earlier this month which is seen as having failed to come up with a firm, immediate plan to solve the debt crisis.

"There seems to be sentiment in favour of (the pound) at the moment," said a trader in London. "The post-EU summit feeling is that the UK is best out of it."

He added that ongoing negative sentiment for the euro would push the currency below 80 pence in the first quarter of 2012.

Against the dollar, the pound rose half a percent to a session high of $1.5585.

Demand from model funds also boosted the UK currency, according to traders, who added that stop-loss orders above $1.5600 could propel the pound higher.

Still, one trader said he was interested in selling the pound around $1.5620-30, which could limited gains in the near term.

UK RISKS.

Sterling has benefited from weakness in the euro, but economic sluggishness and a loss of confidence in Europe is seen posing a risk to Britain, given that the EU is the UK's biggest export market and British banks have a sizeable exposure to euro zone peripheral debt.

Minutes due on Wednesday from the Bank of England's latest policy meeting will be released and are likely to show policymakers are prepared to consider further monetary stimulus to boost the fragile UK economy in the early part of 2012.

Many in the market believe central bank policymakers voted unanimously to keep its asset-buying programme unchanged this month, while keeping the door open to more if necessary.

"I don't think there's going to be any change in the vote split. Everyone knows the situation in the UK, and it's already priced in," said Chris Walker, currency strategist at UBS, adding that the minutes would have limited impact on sterling.

"There is unlikely to be any surprises. We've been hearing from the MPC members, and they haven't really been changing their tone much."