Sterling fell 0.5% to the day's low after the BBC's political editor quoted a source as saying the UK government would pull its Brexit legislation and push for elections if MPs voted down its proposed bill.
The currency had briefly risen above $1.30 yesterday.
But since then it has retreated more than a cent on uncertainty on whether Prime Minister Boris Johnson can get the parliament's nod for his Brexit withdrawal agreement and timetable.
The votes are due later this evening.
Sterling touched a low of $1.2889 and also slipped 0.3% against the euro to 86.28 pence.
"The report has made the market wary that it could see an increase in uncertainty if we head towards an election," Lee Hardman, a strategist at MUFG, said.
However he described the move as a knee-jerk reaction, given the pound's recent sharp rally.