Sterling slid from six-week peaks against the euro on Tuesday as signs of a slowdown in British consumer spending raised doubts over the pace of future interest rate rises.
News on Monday that Britain's manufacturing sector grew at its fastest pace in a decade encouraged investors to bet the Bank of England could raise interest rates by as much as half a point on Thursday.
But a survey on Tuesday showing British retail sales grew at their slowest pace in four months in July made anything more than a quarter-point rate hike extremely unlikely.
"The reality is creeping in that we are unlikely to get anything more than 25 basis points from the Bank of England this week," said Steven Pearson, chief currency strategist at HBOS.
"The risk/reward scenario for sterling has changed, so we are seeing some profit-taking today after its recent out-performance."
The Confederation of British Industry said retail sales growth slowed in July as sales promotions linked to the Euro 2004 soccer tournament ended and higher interest rates started to bite.
The survey contrasted with recent strong UK economic data and encouraged investors to take profits on sterling's recent gains.
Sterling was down half a percent at 66.16 per euro at 1400 GMT, having risen as high as 65.72 pence in Asian trade, its highest against the single currency since mid-June. The pound was also slightly lower against the dollar, at $1.8225.