* Euro erases gains vs dollar on euro zone growth worries
* Sterling slips after BOE inflation report
* Spain announces spending cuts, Portugal taps debt market
(Adds quotes, adds detail, updates prices)
By Steven C. Johnson
NEW YORK, May 12 (Reuters) - The euro fell against the U.S.
dollar on Wednesday, erasing early gains as worries about euro
zone growth outweighed new Spanish spending cuts and a
successful bond sale in Portugal.
The euro <EUR=> retreated to $1.2630, down 0.2 percent,
after rising to $1.2739. Analysts said the market was still
worried about whether weaker euro zone economies would deliver
on promises to trim their deficits, as well as the long-term
impact of austerity measures on European growth.
"I still think the euro is going to continue to slide,"
said Fabian Eliasson, vice president of FX sales at Mizuho
Corporate Bank in New York. "There's going to be very little
growth in the area for quite some time."
The euro hit a 14-month low near $1.25 last week and is
still down nearly 12 percent in 2010. It was up 0.3 percent at
117.65 yen <EURJPY=R> while the dollar rose 0.5 percent to
93.17 yen <JPY=>.
Sterling fell 0.8 percent to $1.4825 <GBP=D4> after the
Bank of England said UK inflation will fall below 2 percent
even if interest rates remain at their current record low.
That stripped the pound of gains seen after Conservative
Party leader David Cameron became Britain's prime minister on
Tuesday.
DEBT WORRIES FOR EURO ZONE, BEYOND
The euro had edged higher overnight as narrowing bond
spreads eased debt worries and prompted speculators to cut back
on bets against the currency, which hit a record high last
week. [] Some investors were said to be increasingly wary
of the pace of the euro's recent decline.
The currency also gained after Spain announced public
spending cuts to trim its budget deficit. The European Union
announced a $1 trillion bailout over the weekend to prevent a
debt crisis that began in Greece from spreading but has
demanded countries make tough spending cuts in exchange.
Portugal's successful sale of 1 billion euros ($1.27
billion) of 10-year debt also raised spirits, as did Lisbon's
assurance that it did not need to draw on emergency EU funds.
For more see [] and [].
Data on Wednesday showed the euro zone economy grew 0.2
percent in the January-March period from the previous quarter,
for a 0.5 percent year-on-year gain. []
Traders said the euro remained vulnerable, with last week's
14-month low near $1.25 serving as significant support.
The euro zone debt crisis has diverted attention from other
countries' finances, but U.S. and UK policymakers warned
Wednesday against complacency.
Bank of England Governor Mervyn King said growth risks had
increased over the last three months, making it more urgent for
Britain to come to grips with its deficit. []
In New York, White House budget director Peter Orszag told
Reuters Insider that lawmakers must act quickly on the budget
deficit quickly to avoid a Greek-style crisis. []
The U.S. budget deficit hit $1.4 trillion in 2009, nearly
10 percent of growth, and the gap could be larger this year.
So far, with growth on the rebound, the country has found
ready buyers for its debt, with Wednesday's $24 billion 10-year
note auction attracting solid demand. []
"There's a sense that if you see a rebound in growth, the
deficit is sustainable," said Andrew Wilkinson, senior analyst
at Interactive Brokers in Greenwich, Connecticut. "But that's
the way of thinking that surrounded Greece, and it could pose a
challenge, especially if you get a double-dip recession."
(Additional reporting by Wanfeng Zhou; Editing by James
Dalgleish)
