STERLING tumbled yesterday after official figures showed a sharp deterioration in the UK's trade gap with the rest of the world, but manufacturing data painted a brighter picture as January output rose by more than expected.

The Office for National Statistics said huge revisions to data in previous months had contributed to the significant increase in the trade gap, which rose to pounds-5.2bn against forecasts of pounds-4.6bn. The unexpectedly sharp increase dragged the pound lower against both the dollar and the euro.

Separate figures released by the ONS showed a 0.2-per cent increase in manufacturing production during January, above market expectations of a 0.1-per cent rise. This took the annual rate of growth up to 1.4-per cent, the highest since June 2004, although the monthly figure was flattered by a downward revision to the December data.

Paul Dales, UK economist with Capital Economics, described the trade data as "simply dreadful". He and others also cautioned that while the manufacturing sector was clearly staging a recovery, this rebound was probably weaker than it would at first appear.

As a result, analysts continue to expect no change in the cost of borrowing when the Bank of England's monetary policy committee announces its interest rate decision later today.

Opinion is divided on the course of interest rates. While some are predicting a quarterpoint rise to 5-per cent by as early as May, Dales was less certain.

"With the external sectors likely to remain a drag on overall economic growth in the foreseeable future, an interest rate hike at April or May's MPC meetings is not a done deal either, " Dales said in a note issued yesterday.

Overall industrial production - which takes in manufacturing, utilities and oil and gas production - fell 0.2-per cent on the month against expectations of no change. The ONS blamed this weak performance on a fall in utilities output in January, one of the mildest in more than a decade, but added that this would likely bounce back in the next set of figures as February was much colder.

The ONS also issued a health warning with its trade figures, cautioning that it was still not certain about its seasonal adjustment process, particularly for measuring non-EU exports. The goods gap with non-EU countries rose to a record pounds-2.99bn in January, while the ex-oil and erratics gap also surged to an alltime high at pounds-5.49bn.

Sterling dropped to dollars-1.9272 against the dollar by late trading yesterday, and also lost ground against the euro to fall to 69.58p.