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The pound has sunk to a four-month low against the dollar after cross-party Brexit talks between the Conservatives and Labour collapsed.

On Friday evening, the pound was 0.52% lower against the dollar at $1.273, having had its worst week in a year.

The pound was 2% lower this week, its steepest decline since February last year when it fell by more than 2%.

Its fall reflects investors pricing a higher chance of the UK leaving the EU without a deal, analysts said.

"While talks with Labour were ongoing, the market was slightly more reassured that an EU customs union or something similar to the status quo would be the outcome," said Eimear Daly, a foreign exchange strategist at Macquarie Bank.

"Now the focus turns to the Prime Minister's ability to retain leadership of the Conservatives, or perhaps a more eurosceptic Tory Party leader," she said.

Pound v Dollar

Against the euro, the pound fell 0.46% to €1.140.

Pound v Euro

Mrs May has promised to set a timetable for the election of her successor after the next Brexit vote in the first week of June.

RBC Capital Markets chief currency strategist Adam Coles said there was growing uncertainty over whether the Brexit bill would pass, as well as doubts over who will replace Theresa May as Prime Minister.

"It looks increasingly likely she will be replaced by a pro-Brexit PM with no election, and that automatically increases the chances of a no-deal Brexit," said Mr Coles.

Since the UK's departure from the EU was delayed in March, the pound has broadly traded above $1.29 against the dollar.

Mrs May will try once again to win the support of MPs for her Brexit deal in the week beginning 3 June, when the Commons votes for the first time on the EU Withdrawal Agreement Bill - the legislation needed to implement her deal with the EU.

Brexit had been due to take place on 29 March - but after MPs voted down on three occasions the deal Mrs May had negotiated with the bloc, the EU gave the UK an extension until 31 October.