Dec. 1 (Bloomberg) -- The U.K. pound posted its biggest one-day loss against the dollar in more than a month while gilts rose after a report showed the housing and manufacturing slump worsened, reinforcing speculation the central bank will cut interest rates this week to revive Britain’s ailing economy.

The British currency declined against all of its 16 major counterparts tracked by Bloomberg after property Web site Hometrack Ltd. said house values in Europe’s second-largest economy dropped in November to the weakest in almost three years. Lenders approved 32,000 loans for house purchase in October, matching the fewest since comparable data began in 1999, a report from the Bank of England showed.

“The economic outlook for the U.K. is grim,” said Neil Jones, head of hedge fund sales at Mizuho Capital Markets in London. “We expect a V-shaped recovery for the pound. But with the central bank likely to cut interest rates aggressively and asset prices falling, the currency is still in the downward trajectory part of the V.”

The pound fell 3.7 percent, the biggest one-day decline since Oct. 27, to $1.4807 and traded at $1.4835 as of 4:55 p.m. in London, from $1.5377 last week. The next key support for the pound, or level where more buying may emerge, is at $1.4545, according to Robin Wilkin, head of currency and commodity technical strategy at JPMorgan Chase Bank in London.

The pound also declined as stocks in Europe and Asia fell, sapping demand for higher-yielding currencies. The FTSE 100 Index slid 5.2 percent. The U.K. currency fell to 85.17 pence per euro from 85.52 pence and to 139.04 yen from 146.89.

The yield on the two-year gilt dropped 19 basis points to 2 percent, the lowest in five days. The 4.75 percent security due in 2010 advanced 0.29, or 2.9 pounds per 1,000-pound ($1,483) face amount, to 104.08. The yield on the 10-year gilt fell 11 basis points to 3.65 percent. Yields move inversely to bond prices.

U.K. Manufacturing

Gilts also rose as another bank failure prompted investors to seek the relative safety of government debt. London Scottish Bank Plc, a U.K. lender to customers with poor credit histories, appointed an administrator after the company failed to find a buyer.

U.K. manufacturing shrank at the fastest pace in at least 16 years in November as the deepening economic slump curbed demand for goods, the Chartered Institute of Purchasing and Supply said today. Its factory index, based on a survey of about 700 companies, was at 34.4, the least since the data began in January 1992, compared with a revised 40.7 in October.

‘Grim’ Outlook

“Data this week will confirm the U.K. economic outlook is grim and growth remains firmly negative heading toward the end of the year,” said Richard McGuire, a senior fixed-income strategist at RBC Capital Markets in London. “Interest rates will fall fast in the U.K. That should continue to support short-dated bonds.”

Gilts beat their European counterparts last month, handing investors a 4.6 percent return, compared with a gain of 4 percent on German bonds, according to Merrill Lynch & Co. U.K. Gilts and German Federal Governments indexes.

The seizure in credit markets and an approaching recession sapped consumer demand in Britain, prompting the Bank of England to cut its key interest rate four times this year from 5.50 percent. Policy makers reduced the rate by 150 basis points to 3 percent in November, the lowest since 1955.

The central bank’s next interest-rate decision is due Dec. 4. Policy makers will cut borrowing costs by 1 percentage point this week from the current 3 percent, according to the median forecast of 60 economists surveyed by Bloomberg News. The Bank of England reduced rates by 150 basis points last month.

“We’ve seen the continuation of really grim news on the economy,” said Kenneth Wattret, a senior economist at BNP Paribas SA in London. “We don’t see much of an impediment to the central bank delivering another big rate cut. Our forecast is for a 100-basis-point cut.”

Bets Against Pound

Futures traders increased their bets the pound will fall against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed.

The difference in the number of wagers by hedge funds and other large speculators on a decline of the pound compared with those on the gain -- so-called net shorts -- rose to 42,431 on Nov. 18, from 39,838 a week earlier.

The yield gap, or spread, between two- and 10-year gilts widened by six basis points to 165 basis points today. The so- called steeper yield curve indicates traders are betting the economic slump will deepen, forcing the central bank to accelerate interest-rate reductions.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

Last Updated: December 1, 2008 12:03 EST