By Patrick Graham
LONDON (Reuters) - Sterling dived more than half a percent against the dollar and euro on Friday after an opinion poll showed Prime Minister Theresa May's lead down to just 5 percentage points over the Labour opposition less than two weeks before a general election.
The pound hit a three-week low of $1.2837, more than two cents below last week's six-month highs, in a succession of falls in morning trade in Europe.
That lifted London's multinational-dominated FTSE share index, which tends to rise when the pound falls, when other European indices were falling sharply.
The assumption that May's Conservatives would win handsomely, strengthening her hand in talks on leaving the European Union, has driven the pound higher since she called an election for June 8.
But the latest poll by the YouGov organisation, taken after Monday's bombing in Manchester, showed her lead is just a quarter of what some other polls showed a month ago and might deliver the slimmest of majorities.
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"Sterling is likely to continue to be under pressure now until the election is out of the way, if polling continues to indicate it's a tighter race," said Nomura strategist Jordan Rochester.
"For the market the worst outcome is if we have further uncertainty with the chances of a hung parliament."
By 1200 GMT, the pound was also down 0.7 percent on the day at 87.15 pence per euro.
"The FTSE 100, which ordinarily would be feeling the pain of this, is actually trading a little higher this morning," said Craig Erlam, an analyst with retail brokerage OANDA.
"A second day of selling in the pound - this time driven by the latest poll numbers - is more than compensating for the weakness in energy stocks."
FISCAL BOOST
The fate of the pound remains dominated by how the British economy reacts to last year's shock decision to leave the EU and speculation over the conduct and outcome of 18 months of talks with Brussels.
When May announced the election on April 18, financial markets' running logic was that a big victory would let her face down hard-line Brexiteers in her party to make the compromises needed for a smoother departure.
In the background, however, others said a defeat for the prime minister would make it harder for the government to push ahead with the clean break from Europe she has outlined and which parliament's other smaller forces oppose.
Labour have also promised to turn back the budget austerity that has dominated seven years of Conservative government while struggling to get the economy growing faster or dig Britain out of debts racked up in the 2008 financial crisis.
"If it is a Labour victory it's perhaps not as bad for sterling as you'd expect given the fiscal spending would likely eventually lead to higher real yields once the initial uncertainty passes," Nomura's Rochester said.
Other strategists noted the lead in the YouGov polling had already been less pronounced than some and that a U-turn on May's unpopular manifesto commitment on social care might help her after a pause in campaigning caused by the bombing.
YouGov's survey, however, also showed the bombing on Monday evening may have improved May's own polling from a low earlier that day when she appeared rattled as she backtracked on her pledge to make elderly people pay more for care.
Her personal rating improved from minus eight on Monday to plus one in the following days, while Labour leader Jeremy Corbyn's personal rating slipped from minus 11 - his best position in the campaign - to minus 16, YouGov said.
"YouGov says the swing in the latest poll is probably due to Conservative manifesto commitments, some of which have changed subsequently," said Adam Cole, head of G10 strategy with RBC in London.
"There will likely be a large number of opinion polls over the weekend, so this picture could change either way in the next few days."
(Editing by Gareth Jones and Elaine Hardcastle)