Sterling slips as oil slides, US rate hike bets grow

July 28 (Reuters) - Sterling fell to a more than three-week low against a stronger dollar on Tuesday as lower oil prices eased inflation concerns, while expectations of a U.S. interest rate hike this week continued to support the greenback.

The pound traded near its weakest level since early July at $1.327 on Tuesday, down 0.1% on the day.

Brent crude retreated 2.6% to $86.08 a barrel, extending its pullback from last week's spike above $100, amid growing hopes of a resolution to the U.S.-Israeli war on Iran after U.S. President Donald Trump said Washington was having "good talks" with Tehran.

Rate-sensitive 2-year gilt yields retreated 3 bps to 4.352%.

The Federal Reserve wraps up its two-day policy meeting on Wednesday, with traders pricing in a nearly 40% chance of a 25-basis-point rate hike, up from about 20% a week earlier, according to LSEG data. U.S. rate futures show 95% probability of a quarter-point increase by September.

"With a September hike now fully priced in by futures, we think that the bar for a hawkish surprise that meaningfully boosts the dollar is high," said Matthew Ryan, head of market strategy at global financial services firm Ebury.

Softer labour-market data has cemented expectations the Bank of England stands pat on Thursday, but unease over the spending plans under the new Prime Minister Andy Burnham have weighed on the pound this month.

Burnham on Monday ruled out any changes to stamp duty, a tax on home sales, at the next budget due later in the year.

Previously Burnham has said he may ask people to pay "a little more" in tax as the country faces major spending pressures from an ageing population and a need to rebuild its armed forces as well as broader investment goals.

The pound was largely unchanged against the euro at 0.855 after retreating 1.1% from last week's one-year high.

(Reporting by Medha Singh in Bengaluru; Editing by Anil D'Silva)