UPDATE 2-Sterling hits one-week low on Brexit deadlock

Sterling fell to a one-week low on Thursday after British and European Union sources said Brexit negotiations had hit an impasse. Nothing at the moment suggests anything will change in Britain's Brexit talks with the European Union over the next 48 hours, a government source said on Thursday, adding that the EU was simply not moving.

EU Brexit negotiators rejected the latest proposals on the Irish backstop presented by Britain's Attorney General Geoffrey Cox in Brussels on Tuesday and told him to rework them and come back on Friday, EU diplomats said. The pound fell half a percent to $1.3089. Against a weaker euro, it gained 0.3 percent to 85.64 pence.

"Hope for any early success for the British government is all but gone now," said John Marley at FX risk management specialist, Smart Currency Business. Further adding to the uncertainty was an amendment passed by Britain's House of Lords on Wednesday calling for the government to negotiate a customs union with the European Union, giving May a potential new headache in her Brexit plans.

"Markets are getting conflicting signals from lawmakers in Britain and the negative news flow from Brussels on the negotiation process and that is keeping the pound in a tight range," said Nikolay Markov, a senior economist at Pictet Asset Management. Most economists in a Reuters poll thought Brexit would be delayed by a few months and the two sides would eventually agree a free-trade deal, according to a Reuters poll conducted between Feb. 28 and March 5.

Expected gauges of market volatility in the pound ticked higher though it remained well below levels seen in November 2018. (Reporting by Saikat Chatterjee and Tom Finn Editing by Raissa Kasolowsky and Jon Boyle)