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UPDATE 1-Brexit uncertainty prompts shock British constuction contraction

* Economic uncertainty hammers UK construction sentiment

* Prospect of higher BoE rates weakens house-building

* Industry expectations at second-lowest level since 2013 (Adds economist and market reaction)

LONDON, Oct 3 (Reuters) - Britain's construction companies in Septmber reported the sharpest fall in activity since just after June 2016's Brexit vote, as clients put projects on hold due to uncertainty over the economy.

Although construction makes up just 6 percent of Britain's economy, the survey suggested it was likely to drag on official third-quarter growth figures, just as the Bank of England gets ready to raise interest rates.

The IHS Markit/CIPS construction purchasing managers' index (PMI) sank to 48.1 in September from August's reading of 51.1, its lowest since July 2016 and far below all forecasts in a Reuters poll of economists.

Anything below 50 is considered a contraction.

Sterling weakened by around a quarter of a cent against the dollar and fell to a day's low against the euro after the data.

"The construction sector is entering its own recession," Samuel Tombs of Pantheon Macroeconomics said. "The government's shift to a more accommodating stance in Brexit talks has done little to convince builders that clients will sanction delayed projects soon."

IHS Markit said the prospect that the BoE will raise rates next month for the first time in a decade was also a factor behind slower house building.

Business investment overall has grown since the Brexit vote, but many business leaders say the government is not making enough progress in Brexit talks with the European Union.

Construction - which has long lead times for projects, and relies heavily on labor from the EU - has been particularly hurt.

Official data last month showed construction orders fell more than 12 percent year-on-year in the three months to June, and the PMI has shown lower orders for the past three months.

Expectations for the future were at their second-lowest level since 2013, Tuesday's survey also showed.

However, shares in housebuilders have gained in recent days after Britain's ruling Conservative Party announced plans to revive a 10 billion pound ($13.25 billion) house-building subsidy.

The manufacturing PMI published on Monday showed a slowdown in growth although it remained solid, and a survey of Britain's huge services industry due on Wednesday will give a clearer idea of third-quarter growth.

"Following on from a softer manufacturing survey for September, the weak construction survey fuels concern that an already lackluster UK economy could be faltering," said Howard Archer, chief economist at consultancy EY ITEM Club.

Britain's economy has suffered its weakest growth so far this year since 2012. Consumer demand has borne the brunt of a rise in inflation to its highest in nearly five years, which is largely due to the pound's tumble after the Brexit vote.

The PMI data showed the cost of building supplies rose at its fastest rate in seven months in September.

($1 = 0.7545 pounds) (Reporting by David Milliken Editing by Jeremy Gaunt)