Sterling trimmed earlier gains against the U.S. dollar as speculation of a rate cut mounted.

Bank policymaker David Blanchflower, well-known for his dovish views on monetary policy, told a regional newspaper on Friday that he would vote for a reduction in interest rates. He backed a 50-basis-point cut last month.

SERVICES SLOWDOWN

The Chartered Institute of Purchasing and Supply/Markit purchasing managers' index for services companies fell to 46.0 last month from 49.2 in August, the worst reading since records began 12 years ago, as new business crumbled, confidence fell and the pace of job-shedding increased.

Not one analyst polled by Reuters had forecast such a big decline. The consensus forecast was for a reading of 48.0.

"Following on from the shocking manufacturing figures and a further considerable reduction in construction sector output for September, the services data provide more evidence of rapidly deteriorating activity in the real economy," said Paul Smith, senior economist at Markit Economics.

Housing equity withdrawals figures from the BoE provided a further sign of an economy turning down.

The central bank said housing equity withdrawals turned negative in the second quarter for the first time in a decade, as households repaid a net 2.8 billion pounds.

Rising house prices in recent years encouraged Britons to refinance their loans to free up cash for other purposes. The drying up of this source of cash could hinder an already-struggling consumer sector.

"TRULY AWFUL"

Data from retailers added to the gloom.

John Lewis, seen as a barometer of Britain's retail sector, said sales plunged 8.3 percent at its department stores and fell 0.7 percent at its upmarket Waitrose food halls in the week ended September 27. This followed a 5.6 percent drop in department store sales the week before.

"A combination of unseasonably sunny, warm weather and a huge amount of coverage of the global economic situation added together to give a very tough trading week," the employee-owned group said of its department stores.

Stripping out the impact of new stores, Pali International analyst Nick Bubb said the figures equated to a 14 percent drop in like-for-like sales at the department stores and a 4 percent decline at Waitrose.

"A truly awful number and provides further support for the idea that trading recently hit a brick wall across the industry," Kaupthing analysts said in a research note.

Blacks Leisure, the outdoor clothing and footwear retailer, issued its third profit warning this year, blaming poor sales during an unseasonably wet August.

Newspaper distribution and aviation services firm John Menzies also said it would miss profit expectations due to a drop in passenger and cargo flights as airlines scale back operations amid fears over the economic outlook.

John Menzies shares dropped as much as 21 percent to a new low of 212 pence, while Blacks Leisure slumped 15 percent to a 12-1/2 year low of 76.5 pence.

(Additional reporting by James Davey; Editing by Andrew Callus)