LONDON, Oct 2 (Reuters) - Global asset prices remain stretched and are vulnerable to a big fall as investors grow more concerned about geopolitical risks, the Bank of England said on Wednesday.

The BoE said overall risks to British financial stability were unchanged compared with its last assessment in June, but that it would be wrong to draw comfort from a rapid rebound in asset prices after a drop in August.

"Valuations across several asset classes, particularly equities, quickly returned to stretched levels following the episode. Markets remain susceptible to a sharp correction," the BoE's Financial Policy Committee said in a quarterly statement.

Weak U.S. employment data and softer-than-expected results from big tech companies led to a market sell-off in August that only reversed after stronger macroeconomic data was published - a boost which investors should not count on happening again, the BoE said.

"Global vulnerabilities remain material, as does uncertainty around the geopolitical environment and global outlook," the BoE said.

A twice yearly BoE survey of major financial firms operating in Britain showed concerns about geopolitical risk had risen to their highest since the survey began in 2008, the central bank said.

That survey was based on responses from 55 firms between July 23 and Aug. 12 and did not specify which sources of geopolitical risk were of greatest concern.

As well as conflict in the Middle East and Ukraine, the U.S. presidential election remains in close focus.

The BoE noted that since June, hedge funds' net short position in U.S. government bonds had risen to $1 trillion from $875 billion. If funds needed to unwind these positions due to changed risk perception, losses or other factors, this cold lead to "severe" stresses, the BoE said.

The central bank also said high levels of public debt across major economies could trigger financial stability risks if investors took a gloomier view of government borrowing.

British public debt has risen to 100% of national income - mid-table by advanced economies' standards - and finance minister Rachel Reeves is due to present her first annual budget on Oct. 30 following the Labour Party's July 4 election.

Looking at specifically at Britain, the BoE said most households and businesses were coping well with high interest rates, although there were some pockets of difficulties for small businesses and those backed by private equity investors.

In August the BoE cut its main interest rate to 5% from a 16-year high of 5.25% before keeping it unchanged at 5% in September. Financial markets see a 90% chance of a further cut to 4.75% on Nov. 7 after the BoE's next meeting.

Lower interest rates meant that mortgage costs for households whose fixed-rate mortgages were expiring next year would rise less than previously estimated, the BoE said. Overall the debt interest burden would be much lower than after the global financial crisis.

The increase in mortgage costs for an average household would be 150 pounds per month, down from 180 pounds.

The central bank last month forecast the economy would grow by 0.3% a quarter in the second half of 2024, roughly Britain's long-term trend rate of growth but less than in the first half of the year when the economy recovered from a shallow recession that occurred in late 2023.

The FPC also said it was keeping the counter-cyclical capital buffer - a tool it uses to manage risks in banks' credit cycle - unchanged at 2%.

(Reporting by David Milliken and Suban Abdulla)

((david.milliken@thomsonreuters.com))

Keywords: BRITAIN BOE/BANKS

By David Milliken and Suban Abdulla