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UPDATE 2-Sterling touches 3-week low vs dollar

(Updates)

LONDON, Aug 10 (Reuters) - Sterling touched a three-week low against the dollar on Thursday as a mixed bag of output and trade data did little to alter investors' downbeat view of an economy struggling to meet Bank of England targets.

The pound fell by as much as a third of a percent in early European trade to as low as $1.2952 before recovering some ground after industrial production numbers just topped economists' forecasts.

By 1450 GMT it was trading down 0.1 percent at $1.2991.

Construction output was weaker than expected and other readings showed Britain's enormous external trade gap expanding further despite the weakening of the pound over the past year.

"Although the industrial data is slightly better than expected, it doesn't materially change the growth outlook," said Sam Lynton-Brown, a strategist with BNP Paribas in London.

"We think this move (in sterling) can extend and our formal target is $1.26 at the end of this year."

The pound has lost more than 13 percent in trade-weighted terms since last year's decision to leave the European Union but Britain's trade deficit with the rest of the world remains huge.

The deficit in goods widened unexpectedly in June, as export volumes suffered their sharpest monthly fall in a year, though they rose 5.0 percent year on year in the second quarter.

On the output side, falling car production and a slide in construction bode poorly for future months after a more general slowdown in the first half of 2017.

As the economic picture has become cloudier, money market pricing for a rise in UK interest rates this year has collapsed and is the main driver of sterling selling since the start of August, analysts say.

"The pound is on the way down. It is drifting towards the lows from last month against the dollar," said Neil Mellor, a currency strategist with Bank of New York Mellon in London.

"The frame of mind is we don't like sterling and we will need a significant upturn in the data to change that."

Against the euro, the pound was down 0.1 percent at 90.51 pence.

(Reporting by Patrick Graham; editing by Nigel Stephenson/Jeremy Gaunt)