The pound fell to a 2021 low and British stocks sank into negative territory as reports that Prime Minister Boris Johnson was preparing to announce new COVID-19 restrictions prompted investors to scale back expectations of an economic rebound.

London's FTSE 100 and FTSE 250 both turned negative with airlines and leisure stocks falling sharply after different media outlets reported Britain could implement tougher COVID-19 measures, including advice to work from home as early as Thursday. 

"The pound is selling off on potential Christmas COVID PlanB restrictions generating a roll back on Bank of England rate hike expectations for December," said Neil Jones, head of FX sales at financial institutions at Mizuho in London.

British Airways owner IAG dropped about 5% while cinema operator Cineworld plunged 7.5%.

Sterling fell 0.4% to $1.3186, its lowest level since December 2020. It also weakened 0.56%  against the euro at 85.52 pence.

The yield on 20-year gilts hit its lowest since February while 10-year yields dropped 4 basis points on the day to their lowest since early September after the reports. 

Interest rate futures BOEWATCH showed a 45% chance of a 15 basis-point interest rate rise by the Bank of England at its December meeting, down from a 57% chance earlier on Wednesday.

(Reporting by William Schomberg, David Milliken and Julien Ponthus; Editing by Saikat Chatterjee) ((; +44 207 542 7778; Reuters Messaging: