Updates market prices, adds analyst comment in paragraphs 14-19

By William James and Sam Tabahriti

LONDON, May 15 (Reuters) - Britain's borrowing costs jumped by the most in over a year on Friday after Andy Burnham, a mayor on the left of the ruling Labour Party, secured a possible path to challenge Prime Minister Keir Starmer, alarming investors and deepening a leadership crisis.

Starmer is struggling to hold on to power after a tumultuous week when one of his main rivals in government quit, accusing him of a lack of vision, and others positioned themselves for potential challenges to his leadership.

After the drama of the last few days, any challenge could now take longer to materialise, as Starmer indicated he would fight to stay in power but would not block Greater Manchester Mayor Burnham from trying to win the seat in parliament he needs to launch his own leadership bid.

Wes Streeting, who quit as health minister on Thursday and is expected to run against Starmer if a formal contest begins, has indicated he too was willing to wait and see whether Burnham can get to parliament.

That could take weeks, paralysing the government as it faces the economic fallout from the wars in Iran and Ukraine.

Britain has had six prime ministers in the last 10 years since Brexit and this latest instability drew the attention of U.S. President Donald Trump, who has criticised his former ally Starmer after Britain declined to join the Iran war.

Asked if Starmer would survive as prime minister, Trump said, "It's a tough thing, unless he can straighten out immigration where he's weak, and if he doesn't start drilling", though asked if Starmer should quit, he added,"I don't say that."

"I think he's a nice man, actually," Trump told reporters aboard Air Force One as he returned from a trip to China.

LAWMAKERS NEED TO 'TAKE A BREATH'

A British minister loyal to Starmer urged Labour Party colleagues to put the needs of the country before internal party politics.

"I think this weekend everyone needs to just take a breath," housing minister Steve Reed told the BBC. "We've had a dreadful week. We've looked appalling to the country in the way that we've behaved."

The potential return of Burnham to Westminster alarmed investors on Friday, as those on the so-called soft-left of the party, including Burnham and former deputy leader Angela Rayner, favour more state involvement in key industries, protecting workers' rights and more tax to spend.

Sterling fell to a five-week low of $1.3319, down around 0.6% on the day and 2.3% lower this week, and is set for its worst week since late 2024.

Benchmark 10-year gilt yields GB10YT=RR - which broadly reflect the cost of new government borrowing - surged to their highest since July 2008 at 5.187%, up almost 0.2 percentage points in their sharpest daily rise since Trump announced his 'Liberation Day' tariffs in April 2025.

Thirty-year yields GB30YT=RR, a barometer of longer-term borrowing and inflation pressures, hit their highest since 1998 at 5.859%, according to LSEG data.

"Gilt markets rely on foreign investors. Until we get a better understanding around the fiscal path forward, political risk premium is likely to keep rising," analysts at Dutch bank ING said.

As well as the political squeeze on UK gilts, global bond markets were under pressure more broadly on Friday, as investors reassessed how quickly interest rates might have to rise to ward off a damaging spike in inflation as oil prices surged nearly $4 on the day.

The main British stock market index closed 1.7% lower .FTSE with bank shares Barclays BARC.L and Lloyds LLOY.L down more sharply, dropping almost 3%.

ROUTE BACK TO PARLIAMENT CONVOLUTED

The route back to Westminster remains far from straightforward for Burnham, a former minister in Gordon Brown's Labour government who has previously tried, and failed, to lead the party.

He needs to win selection to stand as Labour's candidate for a vacant parliamentary seat, and then beat Nigel Farage's Reform UK party and the left-wing Greens in the election to fill it.

Labour won the seat in 2024, but since then the party has fallen behind Reform in opinion polls, and the populist party emerged as the biggest winner in the area in the local elections last week, a trend seen across the country which prompted the move against Starmer.

In trying to secure a return to parliament, Burnham would also likely trigger an election for his Greater Manchester mayoralty, which Reform would also challenge.

For now, Reed said the party needed to get behind Starmer.

"It remains the fact that there is no challenger, no one has gathered 81 nominations to mount a challenge against the prime minister," Reed added, referencing the formal party process for starting a leadership contest.