LONDON- Sterling gained more than 1% on Thursday after a Financial Times reporter tweeted that officials in London were more optimistic about a post-Brexit EU deal after the latest round of talks.
The pound had fallen as low as $1.2819 after Reuters reported that British and EU trade negotiators had failed to bridge their differences on state aid.
But it began to climb after an FT reporter tweeted at 1107 GMT that a "landing zone" for state aid had been identified and that fishing - long a source of friction between the two sides - remained the last sticking point.
As of 1227 GMT, the currency was up 0.3% on the day versus the dollar at $1.2965, having been down as much as 0.7% before the tweets. It had been as low as $1.2819.
Versus the euro it was up 0.2% at 90.66 pence per euro.
In his tweets FT reporter Sebastian Payne said officials in London thought it was "almost certain" that negotiations will enter the "tunnel" -- referring to a stage of intensified negotiations, where small teams work to reach a compromise.
Timothy Graf, head of macro strategy for EMEA at State Street Global Markets, said that over the past couple of weeks market consensus had been building up that a deal would be reached, but that the Reuters report challenged this.
Speculators do not have a net short position on the pound, weekly futures data for the week to Sept. 22 shows.
The EU on Thursday launched a legal case against Britain over its new Internal Market Bill that undercuts earlier legal commitments made by London in its Brexit divorce treaty.
Britain's lower house of parliament approved the Internal Market Bill on Tuesday and it is now with the upper house.
"The Internal Market Bill legal action was expected and not news to the market, but sterling is very sensitive to Brexit headlines as the deadline approaches," said Ian Tew, a sterling trader at Barclays.
This week's round of Brexit talks is the last currently scheduled and EU leaders will assess progress on Oct. 15-16.
A gauge of sterling overnight volatility rose to its highest since March.
(Reporting by Elizabeth Howcroft; Editing by Hugh Lawson) ((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))