Sterling fell against the dollar and the euro today after a report that Britain and the EU were still far apart on the key issue of state aid in Brexit trade talks.

The pound was also hit by the EU launching its legal case against the UK. 

British and EU trade negotiators have failed to close the gap on state aid rules, an issue which is preventing them from reaching an agreement on post-Brexit trading rules, officials and diplomatic sources said. 

Britain said there are still differences between the two sides in negotiations, but that London will work hard to try to secure a deal. 

The EU today launched a legal case against Britain over its new Internal Market Bill that undercuts London's earlier legal commitments under its Brexit divorce treaty. 

The pound, which had started the day slightly up against a weaker dollar, fell on the news that the EU and UK were still far apart. 

Sterling was down 0.6% against the dollar at $1.841, while it was also down around 0.5% against the euro at 91.28 pence per euro. 

A gauge of sterling overnight volatility rose to its highest since March. 

Analysts suggested that  there is further downside ahead for the pound on today's news, adding that sterling could retreat towards $1.27. 

"A no-deal is looking more likely than expectations over the last couple of weeks as sentiment in favour a deal was shaping up nicely," he said. 

This week's round of Brexit talks is the last scheduled so far and EU leaders will again assess progress on October 15 and 16. 

Banks have raised their forecast for the likelihood of the UK leaving the single market and customs union without a trade deal when the status quo transition period ends on December 31. 

Trade negotiations were thrown into disarray last month by the UK's Internal Markets Bill, which would breach the EU Withdrawal Agreement signed in January. 

Britain's lower house of parliament approved the Internal Market Bill on Tuesday and it is now with the House of Lords.