* British economy in Q1 weakest since 2012
* Sterling slides to lowest since March 1
* Expectations of a May rate hike shrivel (Adds details, updates prices throughout)
By Tom Finn
LONDON, April 27 (Reuters) - Sterling tumbled to a two-month low against the dollar on Friday after Britain's economy slowed far more than expected in the first quarter of 2018, slashing expectations the Bank of England will raise interest rates in May.
The pound fell as low as $1.3748 against the dollar, weaker by more than one percent, after data showed Britain's economy grew at its weakest pace since the fourth quarter of 2012.
Against the euro, the pound dropped as much as one percent to 87.85 pence.
The scale of the economic slowdown may unsettle the Bank of England, which meets next week to consider whether to raise rates for only the second time since the 2008 financial crisis.
Market expectations of a rate hike in May more than halved on Friday to 20 percent from around 50 percent before the GDP data. The market is now pricing in less than one 25-basis-point rate move this year, instead of the two increases expected by many economists only a fortnight ago.
"This pushes the hike back to August at the earliest and more likely November," said Jake Trask, a currencies analyst at OFX. "Sterling will be subdued for a while below the $1.40 level."
Others expect no hike until 2019.
The slide marks a major reversal for the pound, which had been among the best performing major currencies in 2018 as investors loaded up on long positions. Just last week, expectations of higher rates lifted it to its highest level since the Brexit referendum in June 2016.
British government bond prices jumped after the data and the FTSE 100 rallied as investors bet that a weaker pound would boost export-oriented companies.
The GDP figures suggest corporate and consumer spending has been hit harder than expected by high inflation and uncertainty about Britain's prospects after it leaves the European Union in March 2019.
Heavy snow in late February and early March were partly to blame for the slowdown, but a fall in construction occurred mostly in January, the Office for National Statistics said on Friday.
"No amount of squabbling over how much of a factor the extreme weather was can mask one blunt truth – Britain's economy is slowing badly," David Lamb, head of dealing at FEXCO Corporate Payments, said.
Nomura economist George Buckley said he expected the pound to fall further in the short term but that it might recover if business surveys for April "show signs of bouncing back" and the government clarifies its position on agreeing a post-Brexit trading relationship with the EU.
Even before Friday's data, many economists began to feel the BoE might be getting cold feet about a rate rise to curb inflation, especially after Governor Mark Carney last week alluded to the possibility of postponing any hike.
Sterling usually performs well in April thanks to seasonal dividend payments and capital inflows. But dashed hopes for higher rates have left it down 1.5 percent versus the dollar this month. (Additional reporting by William Schomberg and Helen Reid, writing by Tommy Wilkes, editing by Larry King)