UPDATE 2-Egyptian pound hits new record low despite Qatar aid
* Bankers say demand for dollars remains strong
* Currency falls 0.5 pct to 6.51 to the dollar
* C.bank reduces size of its daily auction to $50 mln
CAIRO, Jan 9 (Reuters) - The Egyptian pound slid to a new record low on Wednesday, only a day after Qatar threw Cairo an economic lifeline by sending $2.5 billion in aid to help it tackle a currency crisis.
Demand for dollars remained strong as businesses and ordinary Egyptians continued selling the local currency, fearing their funds would lose even more value after weeks of political strife and pressure on Egypt's foreign reserves, bankers said.
Economists say the Qatari money might help the central bank, which has been auctioning dollars daily since the end of last year, to prevent a disorderly fall in the currency.
They say the pound remains overvalued after two years of turmoil that has chased away foreign investors and tourists, so the authorities cannot halt the slide as they struggle to meet demand for dollars, including for imports of food and fuel.
"Qatari support does help alleviate immediate concerns, but is only a stopgap measure, particularly if the central bank keeps auctioning $50-75 million in almost daily auctions, while also providing foreign exchange for wheat and refined oil imports," said Raza Agha, an economist with VTB Capital.
The pound weakened half a percent on the interbank market to around 6.51 to the dollar, near the bottom of the central bank's permitted trading band. Banks grabbed almost all the $50 million dollars on offer at Wednesday's auction.
The central bank has allowed the pound to slide by about 0.5 percent a day against the dollar since it introduced a new currency regime on Dec. 30, saying Egypt's foreign reserves had fallen to a critical minimum.
Until the new regime was imposed, the currency had lost a relatively modest 6 percent in the two years since Egypt's revolution that overthrew president Hosni Mubarak. But in last past 11 days the fall has accelerated rapidly, with the pound losing 5 percent on the interbank market.
Qatari Prime Minister Sheikh Hamad announced the aid, comprising $2 billion in loans and $500 million in outright funding, after meeting President Mohamed Mursi. It comes on top of $2.5 billion that the wealthy Gulf state had already provided since the Arab Spring uprising.
The central bank has spent more than $20 billion in foreign reserves to support the pound since the uprising in early 2011. Reserves stood at $15 billion at the end of December.
The bank offered $50 million to banks on Wednesday, less than the $60 million offered on Sunday and Tuesday and the $75 million at each of four auctions last week. Jan. 1 and Jan. 7 were bank holidays.
Wednesday's sale brought the total amount of foreign currency sold in the auctions to almost $470 million, yet bankers said the currency's slide seemed set to continue.
"As long as it is depreciating daily by 0.5 pct it is not under control at all," said a foreign exchange trader at a Cairo bank.
The bank said the cut-off price at Wednesday's auction was 6.4797 pounds to the dollar - a 0.47 percent fall from Tuesday when the cut-off price was 6.4492 pounds. The central bank said it sold $49.6 million at the auction.
On the interbank market, the central bank limits trades to a 0.5 percent band above or below the weighted average of bids at the most recent currency auction. The weighted average on Wednesday was 6.4798 pounds to the dollar.
The new currency regime also contained a series of measures to dampen demand for foreign currencies, including limiting cash withdrawals from banks.