Sterling fell as Britain remained stuck in Covid-19 isolation due to a new coronavirus strain, although hopes of progress in Brexit talks helped to take some pressure off the British currency.

With days to the end of a Brexit transition period on December 31, the pound had fallen below $1.32, weakening by as much as 2.5% on Monday as much of the world closed borders to the United Kingdom after London identified a highly infectious coronavirus strain.

By 1603 GMT, the pound was down 1% at $1.3325 against the dollar, but was still far from a 10-day low of $1.3190 touched on Monday.

Jane Foley, head of FX strategy at Rabobank, said sterling found some support on Tuesday from reports that the UK and the European Union "could be closing in on a compromise regarding fisheries" - one of the sticking points in the Brexit negotiations.

European Union chief Brexit negotiator Michel Barnier said the EU is giving a "final push" to reach a deal on future trading ties with Britain.

British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen spoke on disagreements over fisheries that are barring a new trade deal, as well as the latest on coronavirus, in a call on Monday.

EU sources also said that the bloc was now willing to accept a reduction in the value of its catch in UK waters of up to 25% over a period of time from 2021.

Against the euro, sterling was down 0.5% at 91.34 pence, after it fell to as much as 92.16 on Monday.

The currency is expected to continue to be volatile even with a Brexit deal amid new lockdowns and border closures, Ms Foley added.

"While a Brexit deal would be a huge move forward, any relief rally in the pound is likely to be tempered by the reality that many sectors will remain outside the reach of any deal and by the concerns over the impact on the economy of the current tier 4 restrictions and border closures," she said.

The EU threw Britain a lifeline on Tuesday, recommending that its 27 members roll back sweeping border closures to let people return home for Christmas and to allow freight to resume.

UK Home Secretary Priti Patel told Sky the government was working with France to find a way to lift border closures.

Britain's two biggest supermarket groups raised the alarm that gaps could start to appear on fruit and vegetable shelves within days if the disruption continued.