Sterling slipped further off recent highs around $1.30 today after Britain's parliament approved a Brexit withdrawal deal but rejected the tight timetable to legislate on the agreement before a October 31 deadline.
British Prime Minister Boris Johnson told parliament that if it defeated him on the timetable and forced a delay until January he would abandon his attempt to ratify the deal and push for an election before Christmas instead.
That led investors to price in elections and Brexit delay.
"Sterling retraced some of its gains again last night after many optimists had to realise that the hope of a happy end next week has now died," Commerzbank analyst Antje Praefcke told clients.
News that Labour leader Jeremy Corbyn met Johnson to discuss a new timetable for passing Brexit legislation briefly moved the pound into positive territory, although it gave up gains shortly after.
Sterling was 0.04% lower to the dollar at $1.2867 today after falling 0.62% yesterdau. It was unchanged against the euro, last trading at 86.34 pence.
"If an election is called I do think the pound will go lower, because elections lead to uncertainty and uncertainty leads to a higher premium into UK investments," said Jordan Rochester, currency strategist at Nomura.
"Even though it's unlikely, you have to price in the risk of Jeremy Corbyn elected government or a Brexit Party involvement in the next government," he added.
Rochester sees the pound heading lower to around $1.27 on an election announcement.
RBC analysts said that if the European Union granted the UK an extention, as seems likely, the pound would reverse the most recent losses.
But they added: "If we are heading for an early election, expect further, but limited, downside."