THE pound sterling and the British stock market fell sharply yesterday, at the end of a week in which the British currency's recent period of strength appeared to have come to an end.

Sterling lost another two pfennigs against the deutschmark to DM2.6502 after dropping 4.5 pfennigs on Thursday as traders continued to take the view that a British interest rate rise was unlikely before the general election which must be held by May.

On a trade weighted basis, the pound slipped from 95.8 to 95.3.

Weak economic data published this week, notably a fall in retail sales in December, are likely to give Mr Kenneth Clarke, the Chancellor of the Exchequer, scope to resist the arguments of Mr Eddie George, the governor of the Bank of England, for a rate rise.

Expectations of higher rates had seen sterling rise 15 per cent in six months, reaching its highest level since sterling was ejected from the European exchange rate mechanism in September 1992.

Shares in London had perked ,up on Thursday in reaction to sterling's fall, with the FT-SE 100 index gaining 52.4 points. The strong pound had been prompting many exporting companies and those with overseas subsidiaries to warn of lower profits, and sterling's drop was accordingly greeted with relief.

But the index gave back all of its gain yesterday, dropping 52.7 to 4,218.8, as traders reacted to a profits warning from Sainsbury, the supermarket group, and weakness on Wall Street.

The Dow Jones Industrial Average fell 94 points late on Thursday and another 70 points while London was open yesterday, renewing - British investors' fears of a significant setback in the US market.

With US Treasury bonds also weak, gilts fell, with long dated issues dropping by around a point.