Sterling trimmed gains to stand 0.1 percent up on day at $1.3592 compared to $1.3630 earlier and moved further away from a post-Brexit referendum high of $1.4377 hit last month. It is now nearly 6 percent down from those levels.

"Sterling remains a sell on rallies and the three PMI data points this week suggests a broader slowdown in the wake," said Kenneth Broux, an FX strategist at Societe Generale in London.

The IHS Markit/CIPS services purchasing managers' index (PMI) rose to 52.8 in April from March's 20-month low of 51.7, a smaller increase than economists had forecast in a Reuters poll and its second-lowest level since September 2016.

Expectations of a rate hike from the Bank of England next week have dwindled to less than 10 percent from more than 90 percent a month ago, crushing hedge fund positions on sterling.

Long sterling positions posted their second biggest weekly drop in eight months last week. But despite the fall in net long bets, overall positions remained within striking distance of a four-year high hit last week.

Against the euro, sterling weakened 0.3 percent to 88.25 pence.

Britain's FTSE 100 rose to a session high, up 0.04 percent as a weaker sterling is expected to boost overseas earnings.

UK gilt futures rose 10 ticks after the weaker-than-expected survey and turned positive for the day.