LONDON - The British pound slid against both the dollar and the euro on Thursday amid worsening risk appetite ahead of the European Central Bank rate decision and amid political turmoil in Italy.

The resumption of gas flows from the Nord Stream 1 pipeline had provided some relief but the tone soured after Italian Prime Minister Mario Draghi handed in his resignation for the second time in a week.

On the domestic front, pound traders were watching the race to replace Boris Johnson as British Prime Minister, with former finance minister Rishi Sunak and foreign secretary Liz Truss making it through to the last round of the contest to become Conservative Party leader.

But analysts said price action in the pound was being affected by the market's appetite for risk.

"GBP price action looks like a function of the broader risk environment, which is currently taking cues from developments in Europe," said Simon Harvey, head of FX Analysis at Monex Europe.

Against the euro, the pound dropped 0.4%, matching a two-week low of 85.40 pence hit on Wednesday.

Sterling also dropped 0.4% against the dollar to $1.19275 but remained above the 28-month low hit last week.

Meanwhile, a surge in debt costs pushed up by soaring inflation to twice their previous monthly peak added to Britain's budget deficit in June, which was its highest since April 2021, data showed on Thursday.

(Reporting by Samuel Indyk; Editing by Edmund Klamann)