Sterling, UK stocks drop after surprise second-quarter contraction

By Olga Cotaga

LONDON (Reuters) - Sterling fell to a one-week low on Friday and British stocks sold off after the UK economy unexpectedly contracted in the second quarter.

The pound fell to the day's low of $1.2088 <GBP=D3> after the gross domestic product data was published, down 0.4% on the day, before recovering slightly.

Against the euro, the pound also fell <EURGBP=D3> and was last down 0.3% at 92.40 pence, not far from the two-year low of 92.65 pence it reached on Thursday.

British government bond yields fell with 10-year Gilts slipping one basis point after the data to 0.48% and five-year Gilts down almost two basis points at 0.336% <GB10YT=RR>, <GB5YT=RR>.

London's export-heavy blue chip FTSE 100 index <.FTSE> briefly pared its earlier losses as sterling slumped after the data.

JP Morgan's UK domestic plays index <JPDEUKDM> that tracks about 30 UK stocks that make all or most of their revenue at home fell into negative territory after the data.

AT 0843 GMT, the FTSE was down 0.3% and the JP Morgan index was down 0.2%.

UK GDP declined by 0.2% quarter-on-quarter in Q2, compared with a 0.5% rise in the first quarter, data showed. A Reuters poll was forecasting zero growth in GDP.

(Reporting by Olga Cotaga, Virginia Furness and Josephine Mason; Editing by Tommy Wilkes)