Sterling falls to 6-month low after weak British data

Updates prices at 1120 GMT, adds quote, context

LONDON, Nov 22 (Reuters) - The pound tumbled on Friday after data showed British business output in November shrank for the first time in more than a year, and retail sales also fell by much more than expected in October.

Sterling hit its lowest on the dollar since May, and was last down 0.56% at $1.2517. If future data continues to show economic weakness, the Bank of England may be forced to cut rates more dramatically than markets currently expect. GBP=D3

Britain's preliminary S&P Global Flash Composite Purchasing Managers' Index, published on Friday, fell to 49.9 in November - below the 50.0 no-change level for the first time in 13 months - from 51.8 in October.

"Today's PMI data were the first real test of the chancellor's budget – alongside businesses reaction to unfolding geopolitical events," said Sanjay Raja, chief UK economist at Deutsche bank.

British finance minister Rachel Reeves announced a budget in late October, which raised taxes on business and the wealthy.

"Underneath the hood, we are seeing stress on hiring plans. Both the manufacturing and services sectors reported falls in hiring plans. And (input) prices – particularly for services – have started to firm as businesses digest the budget tax implications.

"For policymakers, the key question now will be to assess whether the potential inflationary hit from higher taxes offsets the potential demand hit from weaker private demand."

Gilt yields fell, while markets sightly upped their expectations of Bank of England easing. GB/

Separate data also from Friday showed retail sales volumes dropped by 0.7% in October from September, more than expected and the sharpest drop since June.

While the pound fell against most other currencies, such as the Japanese yen and Swiss franc GBPJPY=, GBPCHF=, it was little changed on the euro, which took a tumble on weak euro zone PMI data. FRX/

The euro was last flat on the day at 83.24 pence. EURGBP=D3

(Reporting by Alun John, editing by Samuel Indyk and Alex Richardson)

((Alun.john@thomsonreuters.com))