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Sterling ticks up against dollar to extend rally

* Sterling up 0.1 pct against dollar at $1.6490

* Monday saw highest opening price in 28-months

* Consolidating gains after Friday rally

By Shadi Bushra

LONDON, Dec 30 (Reuters) - Sterling was up slightly in thin trading on Monday after reaching nearly two-and-a-half year intraday highs last Friday.

Investors overall are positioning themselves for the possibility of a sooner-than-expected Bank of England rate hike.

The pound was up 0.1 percent against the dollar to trade at $1.6490 at 0950 GMT, extending last week's rally into the final days of the year.

Sterling saw significant gains against the dollar on Friday as an option barrier was erased at $1.6500 in thin trading. Subsequent profit-taking prompted a retreat from a 28-month high of $1.6577 to close the last full week of 2013 at $1.6486.

The pound is on track to post gains against the dollar for the year, driven in the past six months by a string of data indicating a stronger-than-expected economic recovery in Britain, including last Tuesday's mortgage acceptance figures.

"You have a banking system that clearly is functioning better and more credit is being extended, albeit not to places that the Bank of England wants it to be, like the housing market," said Stephen Gallo, an FX strategist at BMO Capital Markets. "When you have a situation where certain markets are getting pretty hot, capital flows in and currencies appreciate."

Sterling has also been buoyed by expectations that these signs of an accelerating British recovery could prompt the Bank of England to raise rates sooner than previously thought in order to keep the economy from overheating.

The pound was stable against the euro, trading at 83.40 pence, as the euro consolidated the previous session's gains.

The euro's strong performance last week was seen as reflecting some last-minute position adjustments by European banks, which were thought to be repatriating funds to shore up capital ahead of an ECB asset review.