LONDON (Reuters) - Sterling briefly fell to a two-year low against the euro after a media report said new Prime Minister Boris Johnson was preparing to hold an election in the days after the deadline for Britain to leave the European Union on Oct. 31.

FILE PHOTO: Pound coins are seen in the photo illustration taken in Manchester, Britain September 6, 2017. REUTERS/Phil Noble/Illustration

The prospect of a no-deal Brexit, as well as an early election, have hit sterling hard in recent weeks. The pound had found some respite earlier on Thursday as risk appetite returned to financial markets.

But the currency then dropped 0.4% to as low as 92.65 pence per euro, its weakest since Aug. 30, 2017, after the Financial Times, citing unidentified senior aides to the prime minister, reported that Johnson would hold an election in the days following Brexit if lawmakers sunk his government with a vote of no-confidence.

Against the dollar the British currency also dropped to as low as $1.2095.

By 1515 GMT, the pound had recovered and was flat on the day at 92.35 pence against the euro and $1.2148 versus the dollar.

“The pound has been in a pretty narrow range of just over 1% against the U.S. dollar for the past week and the markets are clearly taking stock of the recent declines before embarking on the next move,” said David Cheetham, market analyst at online broker XTB.

Johnson has said he will take Britain out of the European Union on Oct. 31 even if that means leaving without a transition agreement.

He has demanded the EU show it is willing to change the deal it had agreed with his predecessor before new talks can begin. The EU has repeatedly said it will not reopen the negotiations.

Foreign exchange strategists polled by Reuters predict that the pound will trade between $1.17 and $1.20 as the Oct. 31 deadline approaches.

Investors have also been buying options to protect against unexpected swings in sterling, sending the cost of three-month options to its highest since January. Three-month risks reversals, which include the October deadline, imply that investors expect the pound will fall rather than rise.

The median forecast for a Brexit with no deal agreed jumped in an Aug. 2-7 Reuters poll of economists to 35%. That was up from 30% in July and the highest since Reuters began asking the question two years ago. Betting markets also forecast a higher chance of a no-deal Brexit.