By Samuel Indyk

LONDON (Reuters) -The British pound extended its recent drop against the dollar and the euro on Monday driven by investor concerns about Britain's fiscal sustainability as gilt yields rose for a sixth straight day.

Sterling fell as much as 0.7% against the dollar to $1.21, its lowest level since November 2023. It was last at $1.2124.

Against the euro, the pound was down 0.3% at 84.13 pence.

The pound has been in the crosshairs of global currency traders with British markets hit by surging bond yields, a move which originated from the United States due to concerns about rising inflation and lower chances of rate cuts from the Federal Reserve.

Strong U.S. labour market data released on Friday added momentum to the upward march of global bond yields, with money markets no longer fully pricing in any rate cut from the Fed this year.

While higher yields often support the currency, in Britain analysts expect higher borrowing costs may force the government to rein in spending or raise taxes to meet its fiscal rules, potentially weighing on future growth.

"Clearly something is coming to a head and it's not because of anything the UK has done over the last two weeks, it's because of the sensitivity of the UK's fiscal dynamics to rates and inflation," said Dominic Bunning, head of G10 FX strategy at Nomura.

"The question for me is if yields start to stabilise, is that enough of a respite that this sell-off starts to slow or takes a bit of a breather?"

Britain's 10-year gilt yield was up 1.5 basis points on Monday at 4.855%, just below last week's high of 4.925%, its highest since 2008. It rose over 24 basis points last week, its biggest weekly rise in a year. Bond yields move inversely to prices.

Britain's 30-year yield rose to its highest level in 27 years on Monday to 5.472%.

British Prime Minister Keir Starmer on Monday said the government would stick to the fiscal rules set out in finance minister Rachel Reeves' October budget, and that he has full confidence in her. There was little immediate market reaction to his comments.

Reeves gave herself only a small margin of error for meeting her target of balancing spending on public serves with tax revenues by the end of the decade.

The recent rise in borrowing costs and sluggish UK growth data in the second half of 2024 makes reaching that target increasingly difficult.

Attention this week was also likely to be on British inflation data on Wednesday.

Consumer prices are expected to have risen 2.6% annually in December, in line with November, but core CPI is forecast to have moderated to 3.4% from 3.5%.

"This week's release of the December UK CPI data will be crucial in fine-tuning expectations around the risk of a rate cut next month," said Rabobank senior FX strategist Jane Foley.

"Heightened expectations of a February BoE rate cut would likely put the GBP/USD 1.20 level in view."

Futures markets are pricing in around 16 basis points of easing at the BoE's February meeting, implying around a 65% chance of a quarter-point rate cut.

(Reporting by Samuel Indyk; Editing by Emelia Sithole-Matarise and Christina Fincher)