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UPDATE 2-Pummelled pound set for biggest monthly loss against euro in two years

Saikat Chatterjee

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* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv (Updates prices)

LONDON, May 31 (Reuters) - The pound was on track for its biggest monthly loss against the euro in two years on Friday, also losing ground against the dollar as currency markets were swept by rising risk aversion.

U.S. President Donald Trump's shock threat to slap new tariffs on Mexico sent investors to the perceived safe haven of government bonds and the Japanese yen, with political uncertainty in Britain also undermining demand for the currency.

Taking aim at what he said was a surge of illegal immigrants across the southern border, Trump said on Thursday he would impose a tariff on all goods coming from Mexico, starting at 5% and rising until the flow of people ceased.

In Britain, politics are mired in Brexit and nearly a dozen candidates are now vying for the prime minister's job, with the bookmakers' favourite, Boris Johnson, saying the UK should leave the European Union on Oct. 31 even without an agreement on the terms of its departure.

The governing Conservatives lost badly in last week's EU elections, and an opinion poll showed the party would suffer its worst national election defeat ever if a vote were held now . Analysts say that prospect is pushing candidates to take a harder line on Brexit, weakening the pound.

"We remain worried on sterling and look for the pound to fall to 0.90 versus the euro, as the prospect of a new eurosceptic prime minister won't bode well for the markets and represents a clear negative," said Petr Krpata, a currency strategist at ING based in London.

On Friday, the pound was trading less than 1.5% from that level at 88.55 pence and on track for a monthly drop of around 3% against the euro, its biggest loss since May 2017.

Against the dollar, the pound erased earlier losses and was broadly steady at $1.2624. It had fallen as much as a third of a percent at $1.2573. (Reporting by Saikat Chatterjee; Editing by Alexander Smith and John Stonestreet)