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UPDATE 2-Pound chalks up slender gains against weak euro

Sujata Rao

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

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

LONDON, Sept 30 (Reuters) - Sterling edged higher on Monday, benefiting from the euro's weakness and shrugging off data pointing to a contraction in the UK economy as investor attention remained focused on Brexit newsflow.

The British currency traded just off three-week lows against the dollar but rose half a percentage point against the euro as the single currency tumbled after Reuters reported that Germany's leading economic institutes had made downward revisions to growth forecasts for Europe's biggest economy.

By 1330 GMT the pound was up 0.2% at $1.2306, having fallen 1.6% last week. Against the euro, it firmed 0.5%, rising off two-week lows touched on Friday.

The currency, already pressured by Prime Minister Boris Johnson's apparent determination to take Britain out of the European Union on Oct. 31 with or without an exit agreement, was hit again on Friday when a Bank of England policymaker said prolonged Brexit uncertainty could warrant looser monetary policy.

The impact of that uncertainty was evident in data showing the economy contracted at a 0.2% quarterly rate, but grew by 1.3% in the year to June 30. That was higher than estimates for 1.2%, implying continued support from household spending.

The pound did not react to the data, given that there have been few signs of progress in breaking the Brexit deadlock with the European Union.

Johnson has not said how he could push through a no-deal Brexit without contravening a parliamentary law requiring him to seek an extension if an agreement is not reached by Oct. 19. He is also under pressure over allegations that he groped two women 20 years ago. He has denied any wrongdoing.

The government's unchanged stance on an Oct. 31 Brexit has reduced some of the optimism that boosted markets immediately after last Tuesday's Supreme Court ruling that Johnson had acted unlawfully in suspending parliament.

"Market excitement about an imminent deal always seemed a little optimistic and the FX team has opted to sell sterling again," NatWest Markets analysts told clients.

Many investors have expressed their sterling stance in options markets, with renewed Brexit uncertainty reflected in one-month implied volatility contracts.

Sunil Krishnan, head of multi-asset funds at Aviva Investors, said an election looks probable, given markets now widely expect a Brexit date extension.

"We have no strong views on timing or outcome of an election. As a result we are more focused on risk management than trying to bet on a particular outcome," he said, noting he was neutral on sterling.

Despite the gloom, speculators trimmed net sterling short positions in the latest week, data from the U.S. Commodity Futures Trading Commission showed

(Reporting by Sujata Rao Editing by Jane Merriman and David Goodman)