* Sterling slips after BOE inflation report
* Spain announces spending cuts, Portugal taps debt market (Updates prices, adds U.S. monthly budget gap)
By Steven C. Johnson
NEW YORK, May 12 (Reuters) - The euro fell against the U.S. dollar on Wednesday as worries about euro zone economic growth blunted optimism about Spain's spending cuts and a successful bond sale in Portugal.
The euro <EUR=> retreated to $1.2628, down 0.2 percent, after rising to $1.2739. Analysts said investors remain worried whether weaker euro zone economies will 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 $1.4826 <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 posted 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 short positions against the currency; bets against the euro hit a record high last week. [IMM/FX] Some investors were said to be increasingly wary of the pace of the euro's recent decline.
The euro 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 [ID:nLDE64B0MM] and [ID:nLDE64B1Y6].
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. [ID:nLDE64A127]
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 policy makers warned on 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. [ID:nN12170176]
In New York, White House budget director Peter Orszag told Reuters Insider that lawmakers must act quickly on the budget deficit to avoid a Greek-style crisis. [ID:nN12170176]
The U.S. budget deficit hit $1.4 trillion in 2009, nearly 10 percent of growth, and could be larger this year. April marked the 19th straight monthly gap, with the shortfall nearly four times that seen in April 2009. [ID:nWEQ003922]
So far, with growth on the rebound, the United States has found ready buyers for its debt, with Wednesday's $24 billion 10-year note auction attracting solid demand. [ID:N12204008]
"There's a sense that if you see a rebound in growth, the deficit is sustainable," said Andrew Wilkinson, senior analyst at Interactive Brokers Group 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 Leslie Adler)