LONDON, July 18 (Reuters) - Sterling fell by around half a cent against the U.S. dollar on Tuesday after British inflation unexpectedly slowed for the first time since October last year, dampening expectations of a rate increase this year.

Consumer prices rose by 2.6 percent compared with a year earlier, the Office for National Statistics said on Tuesday, down from a nearly four-year high of 2.9 percent in May.

Sterling fell to $1.3028 in response, down 0.2 percent on the day, having traded as high as $1.3126 in the half hour before the release. It also fell 0.6 percent against the euro to 88.445 pence.

Stocks recouped earlier losses to trade flat on the day. (Reporting by London Markets Team)