Support for EU membership ebbs in Britain as Cameron's party rows

By Guy Faulconbridge and Kylie MacLellan

LONDON (Reuters) - Support in Britain for membership of the European Union has declined, two polls showed, suggesting a dispute within the ruling Conservative Party may be undermining Prime Minister David Cameron's campaign for the country to stay in.

Three months before Britons vote on whether to remain in the EU, bookmakers upped the chances that a British exit would follow the June 23 referendum. The pound fell, while the cost of hedging against sharp swings in sterling soared.

An ICM online poll showed the 'Out' campaign had taken a 2 percentage point lead, with support for leaving at the highest level since May 2015. The week before, ICM had the remain campaign ahead by 2 percentage points.

A ComRes telephone poll showed the 'In' campaign's lead had shrunk to 7 percentage points, the narrowest margin seen in its polls since May.

Both polls published on Wednesday were taken on March 18-20, before the Brussels attacks.

Cameron faces one of the deepest crises of his decade-long leadership of the Conservatives after senior cabinet minister Iain Duncan Smith, a staunch opponent of EU membership, resigned on Friday over plans to cut spending on welfare.

His resignation letter took swipes at Cameron and his closest ally, finance minister George Osborne, also an advocate of remaining in the EU.

Divisions over Europe -- an issue that helped sink the Conservative premierships of Margaret Thatcher and John Major -- have amplified such disputes within the party.

"The Tories (Conservatives) are overtly split and that is never a good look," ICM director Martin Boon said.

"It's possible that the split and the budget is creating EU dissatisfaction by proxy, but equally it could be the public moving toward a more pro-Brexit position or just normal sampling variation in the polls. Only time will tell."

Sterling came under selling pressure following Tuesday's Brussels bombings on concern that such attacks could turn British voters off membership of the club they joined in 1973 and voted to stay in by 67 percent to 33 in a 1975 referendum.

Trade-weighted sterling, a broad gauge of the pound's performance against a basket of currencies, fell to a more than two-year low while the implied volatility on three-month sterling/dollar options soared to 14.5 percent, the highest level since mid-2010.

Polls such as ICM's suggest just under a fifth of voters are undecided though betting odds indicate the chances of a Brexit have risen in recent days to 36-38 percent.

BORIS FOR BREXIT

Companies such as BP and GlaxoSmithKline have warned that Britain's $2.9 trillion economy would face years of uncertainty if voters chose to divorce, while Goldman Sachs has said sterling could fall by as much as a fifth.

London Mayor Boris Johnson, a Conservative lawmaker who is supporting a British exit, said that London, the only financial center to rival New York, would prosper outside the EU.

"I think the City would continue to flourish outside the EU and flourish mightily," Johnson told Parliament's Treasury Select Committee, referring to the historic financial district.

Pro-Europeans, including former prime ministers Tony Blair and John Major, have warned that an exit could trigger the break-up of the United Kingdom by prompting another Scottish independence vote. Scottish voters are seen as more pro-EU than their English counterparts.

'Out' campaigners say such warnings are overdone and that Britain would prosper if it broke free from what they say is a doomed German-dominated bloc that punches way below its weight on the international stage.

Johnson was quizzed over his claims that the EU had banned the recycling of tea bags and ordered that children aged under eight should not be allowed to blow up balloons.

Treasury Committee chairman Andrew Tyrie, also a Conservative lawmaker, said that Johnson had exaggerated and misrepresented the EU's position. Johnson said the views of EU opponents were being deliberately misrepresented.

"You're in danger of getting back to delivering us grains of truth with mountains of nonsense again, I'm afraid," said Tyrie, who has not announced which way he plans to vote.

(Additional reporting by William James; Editing by Catherine Evans)

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