UPDATE 3-Sterling hits 1-month low, FTSE gains as Conservative lead slumps

* Graphic: sterling and gilt yields http://bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv (Adds gilts, FTSE close, more comment)

LONDON, May 26 (Reuters) - Sterling suffered its worst falls since January on Friday after an opinion poll showed Prime Minister Theresa May's lead down to just 5 percentage points over the Labour opposition less than two weeks before a parliamentary election.

In a succession of falls in Europe, the pound sank against the euro and by more than a full percentage point against the dollar to its lowest in a month, more than 2 cents below last week's six-month highs.

That lifted London's FTSE share index by half a percent to a record high while other major European markets were falling. The multinational-dominated blue-chip index, which tends to rise when the pound falls, was up for a fifth straight week.

The assumption that May's Conservatives would win handsomely, strengthening her hand in talks on leaving the European Union, has driven the pound higher since she called an election for June 8.

But the latest poll by the YouGov organisation, taken after Monday's bombing in Manchester, showed her lead is just a quarter of what some other polls showed a month ago and might deliver the slimmest of majorities.

"Sterling is likely to continue to be under pressure now until the election is out of the way, if polling continues to indicate its a tighter race," said Nomura strategist Jordan Rochester.

"For the market the worst outcome is if we have further uncertainty with the chances of a hung parliament."

By 1535 GMT, the pound was down 1.2 percent on the day at $1.2785 and 1 percent to 87.15 pence per euro.

"Sterling has been under pressure - intuitively you would think that would have a negative impact on the UK stock market, however, when you look at how the index is constructed, that actually translates to a boost for a lot of companies," said George Salmon, equity analyst at Hargreaves Lansdown.

He and other analysts, however, said it was too early to see any aggressive changes to pricing of particular sectors on the assumption the election result might go against May.


The fate of the pound remains dominated by how the British economy reacts to last year's shock decision to leave the EU and speculation over the conduct and outcome of 18 months of talks with Brussels.

When May announced the election on April 18, financial markets' running logic was that a big victory would let her face down hard-line Brexiteers in her party to make the compromises needed for a smoother departure.

In the background, however, others said a narrow win or small majority for the Tories would make it harder for the prime minister to push ahead with the clean break from Europe she has outlined and which parliament's other smaller forces oppose.

Labour have also promised to turn back the budget austerity that has dominated seven years of Conservative government while struggling to get the economy growing faster or dig Britain out of debts racked up in the 2008 financial crisis.

"If it is a Labour victory, its perhaps not as bad for sterling as youd expect, given the fiscal spending would eventually lead to higher real yields once the initial uncertainty passes," Nomura's Rochester said.

YouGov's survey also showed Monday's attack, which killed 22 people, may have improved May's own polling from a low earlier that day, when she appeared rattled as she backtracked on the pledge to make elderly people pay more for care.

Her personal rating improved from minus eight on Monday to plus one in the following days, while Labour leader Jeremy Corbyn's personal rating slipped from minus 11 - his best position in the campaign - to minus 16, YouGov said.

"YouGov says the swing in the latest poll is probably due to Conservative manifesto commitments, some of which have changed subsequently," said Adam Cole, head of G10 strategy with RBC in London.

"There will likely be a large number of opinion polls over the weekend, so this picture could change either way in the next few days." (Additional reporting by Guy Faulconbridge and Kit Rees; Editing by Alison Williams)