(Updates prices, comment)
By Dhara Ranasinghe
LONDON, May 26 (Reuters) - Sterling briefly touched its highest level in three weeks on Thursday, with the UK government's latest measures to help alleviate a cost of living crisis seen supporting the economy in the short term.
Britain announced a 25% windfall tax on oil and gas producers' profits, alongside a 15 billion pound ($18.9 billion) package of support for households struggling to meet soaring energy bills.
Sterling has been hit hard in recent weeks by growing fears that Britain's economy is heading towards recession and analysts said signs of government support could help lift sentiment toward the currency, which has rebounded this week.
They noted it should also ease pressure on the Bank of England (BoE), which is caught between raising rates to contain inflation and being mindful of a deteriorating growth outlook.
The pound briefly touched a three-week peak at $1.2620 before drifting lower. In late London trade, it was just 0.1% softer at $1.2567 with a failure to push significantly above the $1.26 level seen as encouraging profit taking.
Against a broadly-firm euro, sterling was down 0.4% at 85.25 pence per euro.
"My take is that this (package of measures) is a good thing for growth in the short-term," said Henry Occleston, European macro strategist at Macro Hive in London.
"The UK government has so far been very tight with the purse strings and this should make the BoE's job of tightening a bit easier as it provides a bit of an offset to the cost of living crisis."
The Bank of England has hiked interest rates four times since December and markets expect it to hike again, by a quarter of a percentage point, in June.
BofA analysts meanwhile said in a note that the extra fiscal stimulus unveiled on Thursday would translate into modest additional pressure for more rate hikes.
"Sterling has been weak in relative terms in recent weeks in part because we (Britain) have done less to offset the impact of rising energy costs," said Kit Juckes, head of currency strategy at Societe Generale, speaking before the measures were announced.
"The big FX positions you can see have been a big short in the yen and sterling," he noted.
(Reporting by Dhara Ranasinghe Editing by Mark Potter, Kirsten Donovan)