THE pound has risen sharply against sterling, closing yesterday at 103.75p, from 103.45 a day earlier. Analysts expect it to go as 104p over the next couple of days and smaller companies are calling for a further reduction in interest rates.

The last time the pound was ate this level was on January 25th last.

The pound gained against sterling as the British currency hit two year lows against the dollar. Dealers said the markets were worried about the future of the Conservative government ahead of local elections, as well as about the British economy.

The pound proved popular in international markets, although overseas demand for Irish bonds was not as high as recently. Analysts were surprised by the volume of money flowing into the pound, given that most of Europe was on a May Day holiday.

The pound weakened slightly against the deutschmark, closing at DM2.3785 from DM2.3809 a day earlier. It also eased a little against the dollar at $1.5505 from $1.5522. This was in line with sterling.

Mr Jim Power, chief economist at Bank of Ireland Treasury, said weak first quarter GDP figures earlier this week as well as a very weak purchasing managers index yesterday made the argument for British rate cuts more convincing.

The Tories are also defending 1,166 seats at the local election today and could lose as many as 650 to 700. "That sort of defeat makes a Labour victory at the next election even more likely. More seriously, it could expose even greater divisions in the Tory party," he said.

"On top of that, it is clear that Chancellor of the Exchequer, Mr Kenneth Clarke will find it difficult to find the money for a tax giveaway budget in November if they last that long," he added.

Part of the reason for to strong international demand for the pound is the strong belief now that monetary union will go ahead and that Ireland will be part of it.

Mr Brendan Butler, director of the Small Firms Association criticised Government exchange rate policy. "These increases make it clear that small firms are going to be hung out to dry on this one, said Mr Butler.

"The Government must act now and cut interest rates to take the pressure off the pound. The only other choice is to set up a safety net for the hundreds of small firms which may be driven to the wall over this."

He also pointed out that more small firms are now importing goods from Britain. "That is not good for the Irish economy and will ultimately upset our balance of payments," he said.

British manufacturing output fell in April for the third month in a row as companies suffered the sharpest drop in new orders since 1992, according to the Chartered Institute of Purchasing and Supply (CIPS). It said its purchasing managers index (PMI) fell to a seasonally adjusted 48.3 per cent in April from 49.4 per cent in March.

The output index fell to 49.6, the first time it has been below 50 since October 1992. Consumer .goods manufacturers were the only companies reporting an uptown in production while output of capital and intermediate goods declined.

There was good news on the inflation front. The prices index registered the sharpest drop in prices since the survey began.

City economists said the figures were weaker than expected and some thought they increased the likelihood that Mr Clarke, who has cut interest rates three times since December, will do so again next week.

Mr Clarke and Bank of England. governor Mr Eddie George will review interest rates, now at 6 per cent, at their monthly monetary meeting on Wednesday.