Stg climbs from 3-week low but high UK borrowing weighs

* Sterling recovers from 3-week lows versus dollar

* Pound up 0.70 percent to $1.4575

* Rise in UK borrowing dampens sterling outlook

* UK factory orders, BoE's Blanchflower eyed

Sterling gained versus the dollar on Thursday, as some investors took advantage of the previous day's tumble to buy, though the prospect of Britain's budget deficit ballooning to a record capped gains.

In his annual budget, finance minister Alistair Darling said Britain will run a budget deficit of 12.4 percent of GDP and issue a record 220 billion pounds of gilts for the fiscal year.

The market was also eying data on British factory orders expected later in the day after Bank of England policymaker David Blanchflower said he saw tentative signs of a turnaround.

"There are two things that accounted for sterling's weaker performance on the back of the budget," said Phyllis Papadavid, currency strategist at Societe Generale in London.

"One was that the near-term fiscal slippage does not necessarily bode well. The second factor is that they're trying to adjust for the multi-decade high in the budget deficit by raising taxes. It's clear that there's fiscal tightening further out."

Papadavid attributed the uptick in sterling to overseas factors. "The dollar is a bit weaker on the back of the move in equities we saw overnight," she said.

At 0827 GMT, sterling was up 0.70 percent to $1.4575 against the dollar. The euro fell 0.39 percent to 89.44 pence.

Sterling fell to $1.4397 on Wednesday, its lowest since early April after the budget figures were announced.

ECONOMIC OUTLOOK WEIGHS

Darling forecast Britain's economy would shrink 3.5 percent this year, its fastest contraction since World War Two, but that it would grow by as much as 1.5 percent in 2010.

But the International Monetary Fund on Wednesday was more pessimistic, forecasting a 4.1 percent contraction for Britain this year and a drop of 0.4 percent in 2010.

"Darling's budget speech delivered a heavy blow to GBP. Besides the massive rise in 2009/2010 borrowing ... the government's optimistic economic growth outlook for 2010 and 2011 also raises concerns as it is at odds with the IMF forecast," Commerzbank said in a note.

Striking a somewhat less dour note, BoE's Blanchflower said there were tentative signs of an economic turnaround though forecasts for growth were still on the optimistic side and that "tough times" were still ahead.

Blanchflower, who steps down from the bank's Monetary Policy Committee at the end of next month, said there were indications of a pick-up in the housing market with mortgage lending on the rise.

Data on British factory orders for April is on Thursday's calendar. Analysts polled by Reuters expect a drop in the order book balance to -54. In March, the orders fell at their sharpest rate in 17 years.

FTSE flat early on; banks weak; retailers gain

* Banks weak after Morgan Stanley loss

* Pharmas retreat led by GlaxoSmithKline

* Retailers buoyed by Debenhams results

Britain's top shares were flat in early trading on Thursday, with weakness in banks and drug issues offsetting fresh strength in retailers following strong results from Debenhams DEBS.L.

By 0813 GMT, the FTSE 100 index was 1.3 points higher at 4,031.92, after closing up 43.2 points, or 1.1 percent at 4,030.66 on Wednesday.

"After yesterday's budget, the market is in a bit of a no-man's land at the moment, just toying with the 4,000 level as investors wait for something to more to pull the market one way or another," said Tim Hughes, head of trading at IG Index.

Banks saw Wednesday's resillience fade following falls overnight by U.S. peers after results from Morgan Stanley (MS.N) undermined the recent more upbeat trend in the depressed sector.

The U.S. Dow Jones industrial average .DJI and the S&P 500 .SPX indexes fell on Wednesday after Morgan Stanley reignited worries about the banking sector as it posted its second straight quarterly loss and slashed its dividend.

Among other financial issues, fund manager Schroders (SDR.L) was the biggest FTSE 100 faller, down 3 percent after reporting a 54 percent drop in first-quarter pretax profit and saying the high level of market volatility continued to affect investor demand.

Insurers suffered as well with Wednesday's budget move to curb pension relief for high earners expected to impact the sector. Aviva (AV.L), Prudential (PRU.L), and Standard Life (SL.L) lost 0.3-3.0 percent.

Prudential was also knocked by another broker downgrade. JP Morgan cut its stance to "neutral" from "overweight", while both Morgan Stanley and HSBC reduced ratings earlier this week.

Drug stocks were also the main drag on blue chip sentiment, with GlaxoSmithKline (GSK.L) losing 1.2 percent on further reflection of Wednesday's disappointing first-quarter, while AstraZeneca (AZN.L) shed 0.7 percent.

Heavyweight oil issues retreated with the crude price CLc1, with Royal Dutch Shell (RDSa.L) and BG Group (BG.L) shedding 0.5 and 0.2 percent respectively.

But miners managed to rally from early falls led by Lonmin (LMI.L), 3.3 percent higher after the platinum miner issued a reassuring production update.

Lonmin said platinum sales rose 30 percent in the second-quarter and reaffirmed its 2009 guidance, prompting Cazenove to raise its rating to "in-line" from "underperform".

RETAILERS ADVANCE AGAIN

Retailers topped the blue-chip leaderboard, building on Wednesday's advance following further upbeat trading news in the sector, with mid cap department stores group Debenhams DEBS.L reporting solid results.

Debenhams saw its first-half pretax profit and sales beat market forecasts and said trading had improved in the first weeks of its second half.

Debenhams shares topped the FTSE 250 .FTMC leaderboard, up 18.9 percent, while retailers took the top three spots on the blue-chip gainers list, with Next (NXT.L), Marks & Spencer (MKS.L) and Home Retail Group HOME up 6.6, 5.9 and 4.6 percent respectively.

Support services firm Capita Group (CPI.L) was another good blue chip gainer, ahead 3.2 percent after Morgan Stanley raised its rating to "overweight" from "underweight".

After a deluge of domestic economic pointers over the past few sessions, no important data was due on Thursday.

However, Bank of England policymaker David Blanchflower said there were tentative signs of a turnaround in the British economy, but forecasts for growth were still on the optimistic side.