Sterling headed towards its biggest loss in almost six years against the dollar on Monday, hit by a rise in the odds on a "Brexit" after a handful of senior ruling Conservatives joined the campaign to leave the European Union.

The scale of the reaction on sterling, a 2 percent fall to a seven-year low against the dollar, driven chiefly by the defection of London Mayor Boris Johnson to the "out" camp on Sunday, also sent government bond prices lower. However blue chip share prices were higher, with a cheaper pound seen as helping exporters.

Ratings agency Moody's said that it would consider shifting the outlook on Britain's credit rating to negative while analysts from the world's biggest currency trader, US bank Citi, told clients that the chances of Britons voting to leave the 28-country bloc had risen to 30-40 percent.

Bookmakers have also raised the odds to 33 percent from 29 percent before Prime Minister David Cameron sealed a deal on Friday with which to fight the June 23 vote.

"Until now, the Brexit side has lacked the backing of one of the heavyweight figures in UK politics," Citi's chief UK economist Michael Saunders wrote.

"That has now changed with the backing of (Justice Secretary Michael) Gove and, in particular, Johnson."

The cost of hedging against falls in the exchange rate shot up to its highest in more than four years and the Bank of England's trade-weighted measure of the pound's value hit a 15-month low.

Sterling hit a seven-year low of $1.4057 and fell 1.5 percent against the euro.

Concern over Britain's possible departure from the EU have been at the heart of a fall in sterling since November and several banks are now talking up the chances of a slide to as little as $1.30.

"We've not seen many Brexit trades being put on (today) but our corporate desk is seeing more hedging being put on by corporates who have sterling exposure," Morgan Stanley analyst Jacob Nell said.

Nell, who expects the pound to fall to $1.30 by the end of 2016 in the event of a Brexit, said he would be watching for signs of how active Johnson plans to be in campaigning in the months ahead.

Opinion polls and further turbulence around migration or terrorist attacks on cities in Europe may also shift sentiment, he said.

STOCK SPLIT

Beyond the currency, the impact on business, banking and policy of a four-month run-in to the June 23 vote looks more nuanced.

Some banks have raised the prospect of the Bank of England cutting record-low interest rates further to offset any damage to economic growth in the short-term.

That might weaken the pound but could further inflate the value of other assets including stocks seen as well-insulated against the negatives of a Brexit.

US bank JP Morgan recommended buying British exporters against domestically focussed companies and blue chip stocks over smaller-cap stocks.

"In the event of the UK leaving, the initial knee-jerk impact on the market could be quite negative," JPM said. "But we believe the resulting weakness of sterling and the BoE action will cushion a chunk of the fall in equities."

The FTSE 100 index rose 1.4 percent while the smaller-cap FTSE 250 gained less - around 1 percent. - Reuters