Sterling trimmed early gains on Tuesday after a German government spokesman denied a media report that Chancellor Angela Merkel was willing to put a time limit on the Northern Ireland backstop in Britain's EU withdrawal agreement.
The UK currency had briefly jumped to the day's high after the BBC reported that a British eurosceptic lawmaker had been advised that Merkel was willing to put a five-year time limit on the backstop.
Disagreement between London and the European Union over the "Irish backstop" is blocking a Brexit deal from getting through Britain's parliament.
A German government spokesman, however, dismissed the media report as "without any foundation" and the pound gave up gains to stand just 0.2 percent higher at $1.3079 by 1030 GMT.
It had climbed as much as nearly half a percent to $1.3122 after the report, compared with $1.3076 earlier. It had also strengthened a third of a percent against the euro to 86 pence.
With barely days remaining for Britain to negotiate a second delay to its departure from the EU beyond the current date of April 12, sterling traders are braced for either a lengthy delay or the prospect of crashing out of the European Union without a deal in place.
While British lawmakers have made it clear that a hard Brexit is not acceptable, there is still no clarity on what would be the nature of the deal between London and Brussels.
"For the pound it seems like a fairly binary outcome of either a hard exit or a long delay, neither of which are positive for the currency in the medium term," said Neil Jones, head of hedge fund sales at Mizuho in London.
While British Prime Minister Theresa May was due to travel to Berlin and Paris on Tuesday ahead of Wednesday's EU summit in Brussels, British lawmakers will hold a 90-minute debate on her proposal to delay Britain's EU departure date to June 30 from April 12.
The debate has been forced on the government by parliament passing a law on Monday that will give lawmakers the power to scrutinize and even make legally binding changes to May's request to extend the Article 50 negotiating period again.
Currency derivative markets painted a cautious outlook with implied volatility gauges for the pound remaining elevated compared to other currencies such as the euro and the yen.
On the eve of an EU summit of national leaders due to decide on whether to grant Britain another Brexit delay, the euro zone's chief negotiator Michel Barnier said the length of any second postponement beyond the current date would depend on the rationale presented by May. (Reuters)