By Jemima Kelly and Ritvik Carvalho
LONDON (Reuters) - Sterling fell only briefly on Wednesday after an assailant stabbed a policeman and was shot by police just outside Britain's parliament building in London in what police described as a "terrorist incident".
Eyewitnesses said a car had crashed into pedestrians on nearby Westminster bridge shortly before the incident, in which Sky News said two people were killed. The total number of casualties was unclear.
The initial reports drove sterling to the day's lows against the dollar and euro, but as it emerged that an assailant had been shot, and with no reports of other separate incidents, the pound recovered to trade broadly flat on the day.
By 1740 GMT, the pound was trading at $1.2482, having briefly fallen to as low as $1.2424, and up from levels of around $1.2450 <GBP=D3> before the news.
It also recovered from the day's low of 87 pence per euro <EURGBP=D3> to trade flat at 86.62 pence.
British government bond futures <FLGcv1> fell back from the session high struck immediately after the incident.
"Maybe the market is not viewing this as sufficiently sizeable to hit the radar," said Neil Jones, head of hedge fund FX sales at Mizuho in London.
"Some of these incidents don’t necessarily cause a massive exodus of investors from the currency. If you look at what happened in Germany and France in the last couple of years, you didn’t see a dramatic sell-off in the euro. People just get on with their business as normal."
Jones added that the market was already in the midst of paring back big bets against sterling, and this, along with broad dollar weakness, was helping its recovery on Wednesday. Data showed net short sterling positions hit a record high in the week to last Tuesday. [IMM/FX]
"ELEMENT OF RELIEF"
"There's probably a little bit of -- if we can call it this -- relief, because of course we're still waiting to find out about the number of casualties, which of course is extremely sad, but ultimately it appears at this early stage to be a lone individual," said Jeremy Stretch, head of currency strategy CIBC World Markets.
"It's not at this stage appearing to be a coordinated attack or something more substantive than that, so I think there's an element of relief in that regard."
Stretch added that investors were refocusing on other factors, such as UK retail sales data due on Thursday, as well as a key healthcare reform vote in the U.S. Congress.
Sterling earlier hit a four-week high of $1.2507, having surged 3 percent in the past week on a downturn in the dollar amid rapidly accelerating inflation, and after Bank of England minutes last week one policymaker voted for a rise in rates.
Britain’s blue-chip FTSE 100 <.FTSE> and mid-caps <.FTMC> share indexes both ended slightly off earlier lows, down 0.7 percent and 0.8 percent respectively.
(This version of the story corrects price in 4th paragraph)
(Reporting by Jemima Kelly, Ritvik Carvalho and Danilo Masoni; Editing by Catherine Evans)