The pound rose to $2.0002 after the inflation report was released, its highest level since "Black Wednesday" in September 1992, when Britain crashed out of the European Exchange Rate Mechanism.

Despite dropping back to $1.9985 up from $1.9900 late Monday in New York analysts said the currency was on its way up after breaching the psychological $2 mark and the release of U.S. housing and inflation data later Tuesday could see another spike above that level.

"So far the move has proved to be unsustainable, but with U.S. economic data due later in the session, further dollar downside may be seen in due course," said David Jones, chief market analyst with CMC Markets.

Buyers with his firm had placed orders as high as $2.0005, he said.

"We believe that sterling could well remain above $2 for an extended period," said Howard Archer, chief economist at Global Insight.

The government's Office for National Statistics revealed Tuesday that consumer price inflation accelerated to 3.1 percent in March, up from 2.8 percent in February.

The headline rate of retail price inflation, which includes mortgage interest payments, rose to 4.8 percent from 4.6 percent.

The rising CPI rate, well above the Bank of England's target of 2 percent, adds pressure for a further rise in official interest rates, which are currently at 5.25 percent.

The bank has raised the base rate by three-quarters of a point since August and economists had been predicting one more rise in the coming months to close off the current cycle of increases but the data has prompted speculation about more than one hike.

Investec Securities chief economist Philip Shaw said the inflation figures made an interest rate increase "a certainty, along with the possibility of another rate rise beyond that."

However, he added that the bank was unlikely to have a "knee-jerk" reaction and raise rates at their May meeting, which is just two weeks away.

Jonathan Said, senior economist at the Centre for Economics and Business Research, said the data "opens the possibility of rates rising beyond 5.5 percent after May towards the 6 percent level."

The soaring inflation figures have also triggered the requirement that Bank of England Governor Mervyn King write a letter of explanation to Treasury Chief Gordon Brown for the first time. King is required to write an open letter to Brown if the inflation rate runs more than 1 percent above or 2 percent below the target.

The pound reached its highest levels since before Britain was forced to leave the system that pegged the pound to the currencies of other EU members after currency speculators drove it out of its allowed range.

Then-Prime Minister John Major raised interest rates twice on Sept. 16, 1992, and authorized the spending of billions of pounds in a doomed attempt to stop the currency from crashing out of the exchange rate mechanism, on a day the current Treasury Chief Gordon Brown described as "Black Wednesday."