LONDON - The pound fell against the dollar on Friday as fresh data fuelled worries about a slowdown in a UK economy that is grappling with inflation at a four-decade high.

Britain's businesses grew at their slowest pace in 17 months in July and inflation pressures eased, according to an industry survey on Friday that might ease pressure on the Bank of England to deliver a big interest rate hike next month.

UK retail sales volumes meanwhile fell by 0.1% from May, official data showed, although this was better than the 0.3% monthly fall expected by economists polled by Reuters .

Sterling fell 0.4% to $1.1961 but remained above the 28-month low hit last week. And it was set to end the week 0.75% higher - its biggest weekly rise since late May.

The pound rose as much as 0.34% to 84.93 pence per euro, recovering from just over two-week lows touched on Thursday after a larger-than-expected rate hike from the European Central Bank boosted the euro.

"If you're looking at sterling, you want to watch how the situation with spreads pans out," said Stephen Gallo, European Head of FX strategy at BMO Capital Markets.

With Italian bonds underperforming the rest of Europe, that is likely to put a ceiling of around 86 pence on the euro/sterling spread, according to Gallo.

The Bank of England is also tasked with the tricky objective of taming surging prices while avoiding a harsh economic downturn.

Surging petrol and food prices last month pushed British inflation to its highest rate in 40 years.

The BoE has raised interest rates five times since December. The next meeting is scheduled for August with market expectations for a larger 50 bps hike.

The race to replace Boris Johnson as British prime minister, which has narrowed to two candidates, Liz Truss and Rishi Sunak, also remained in focus.

Their diverging approaches to fiscal policy could be a key driver for sterling in the coming months.

"Any change in the implied odds or the various change in the polls are going to be tradeable events," said Gallo.

"On balance, Sunak is moderately sterling bullish, but at the end of the day whoever wins is going to be inheriting a difficult situation."

(Reporting by Lucy Raitano; editing by Mark Heinrich)