Sterling treads water after drop; outlook bearish

* 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

LONDON, Aug 8 (Reuters) - Sterling steadied on Tuesday after posting its biggest four-day decline in two months against the dollar as investors grew bearish about the outlook of the economy.

The British pound was broadly flat against the dollar at $1.3032 after weakening 1.4 percent in the last four sessions. It was the biggest four-day losing streak since mid-June, according to Thomson Reuters data. "The Brexit negotiations doesn't seem to have started on a strong note and that is weighing on the economy and the currency," said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt. British retail sales grew more slowly in July, data on Tuesday showed, as shoppers cut back on non-essential spending and budgeted for the higher price of food following the June 2016 Brexit vote.

Against the euro, sterling was poised to strike a fresh 10-month low below 90.61 pence after the monetary policy outlook between the European Central Bank and the Bank of England showed more signs of diverging in recent days.

It has fallen 1.4 percent in the last two sessions, touching its lowest level since October 2016 on Monday.

Although BoE rate-setters tried last week to drive home the message that interest rates are likely to rise, the market has chosen to focus on their 6-2 vote to keep rates on hold, down from 5-3 in the last meeting, as well as downward revisions of growth and inflation forecasts.

The ECB is set to reconsider its monetary stimulus programme in the autumn. Core inflation in the currency bloc unexpectedly accelerated to a four-year high last month while unemployment has fallen to its lowest since 2009.

"The pound should be even weaker than the dollar as U.K. political risks increase and economic growth moves towards the back end within the G10 countries," Morgan Stanley strategists said.

(Reporting by Saikat Chatterjee; Editing by Catherine Evans)