By Beth Mellor Dec. 1 (Bloomberg) -- The pound advanced against the dollar and the euro as house prices rose for a seventh month and Dubai World began talks with banks, easing concern a delay in debt payments will hurt U.K. lenders. The pound snapped three days of losses against the U.S. currency after Nationwide Building Society said the average cost of a home in the U.K increased 0.5 percent in November. Dubai World began negotiations to restructure about $26 billion in debt and said the remainder of its $59 billion of liabilities is on “a stable financial footing.” “The market seems more confident about the Dubai situation,” said Steven Barrow, head of group of 10 currency strategy at Standard Bank Plc in London. “U.K. banks are at the forefront of this problem and therefore an easing of the problem gives sterling a special lift.” The U.K. currency rose to $1.6598 as of 2:30 p.m. in London, from $1.6440 yesterday. Sterling strengthened to 90.94 pence per euro, from 91.25 pence. Royal Bank of Scotland Group Plc, Britain’s biggest government-controlled bank, was Dubai World’s largest loan arranger since January 2007, according to JPMorgan Chase & Co. HSBC Holdings Plc, Europe’s No. 1 bank, had the most at risk to the United Arab Emirates since the end of 2008, JPMorgan said. The pound climbed even as an index compiled by the Chartered Institute of Purchasing and Supply and Markit Economics showed U.K. manufacturing expanded last month less than economists predicted. ‘Limp Out’ Gains by the pound may be limited amid a slower recovery in the U.K. than elsewhere in Europe and the U.S., according to Morgan Stanley. While the 16-nation euro region and the U.S. exited recession in the third quarter, U.K. gross domestic product dropped in the period. The pound slipped 0.1 percent against the U.S. currency in November and dropped 1.9 percent against the common European currency. The U.K. is “likely to limp out of recession, certainly relative to its global peers,” Morgan Stanley strategists Graham Secker and Catharina Luebke-Detring wrote in a note to clients dated yesterday. An indecisive U.K. election result next year may also weaken the pound, they said. “At the current juncture a lack of leadership from the top could have severe ramifications for foreign-exchange and bond markets and could prompt a sharp drop in sterling,” the analysts wrote. The U.K. currency has advanced 5.2 percent against the euro and 14 percent against the dollar this year. Pound Versus Kiwi Investors should buy the pound against the New Zealand dollar, or the kiwi, targeting 2.3240, according to Standard Bank’s Barrow. “Our sterling-kiwi indicators have been positive since Nov. 27, and we have decided to recommend a long position,” Barrow wrote in a report. “Sterling looks good against the Australian dollar.” The U.K. currency fell 0.4 percent to 2.2865 against the New Zealand dollar, and rose 0.2 percent to 1.7988 versus the so-called Aussie. Government bonds were mixed, with the yield on the 10-year gilt climbing 3 basis points to 3.55 percent. The two-year note yield fell 4 basis points to 1.14 percent. That drove the difference in yield, or spread, between two- and 10-year gilts to 242 basis points, the widest in almost a week, as investors favored shorter-dated securities, which are more sensitive to interest-rate expectations. The yield on the short-sterling interest-rate futures contract expiring in September 2010 declined 3 basis points to 1.30 percent, signaling investors raised bets that borrowing costs will stay lower for longer. Britain sold 5 billion pounds of gilts maturing in 2015 today, with the 2.75 percent securities attracting bids equivalent to 2.16 times the amount offered, up from a so-called bid-to-cover ratio of 2.06 percent at an auction last month. To contact the reporters on this story: Beth Mellor in London at bmellor@bloomberg.net

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