By Tommy Wilkes and Sujata Rao
LONDON, Oct 24 (Reuters) - Sterling fell on Thursday as investors awaited the European Union's decision on whether to grant Britain a Brexit extension and for how long, while also weighing up the potential risks posed by a possible general election in coming months.
After surging to a 5-1/2 month high on Monday, the pound has come back under pressure after British lawmakers blocked Prime Minister Boris Johnson's plan to push through a withdrawal agreement and get the UK out of the EU on Oct. 31.
Johnson has vowed to seek an election if Brexit is delayed until January, although many analysts doubt there is sufficient support in parliament for a pre-Brexit election.
Either way, the Brexit end game is more uncertain than traders thought last week, setting up the pound for another rocky period. By 1350 GMT, the currency had slipped 0.3% to $1.2875 GBP=D3, while against the euro it dropped 0.2% to 86.315 pence per euro EURGBP=D3.
Analysts said the next big development would come once the 27 other EU countries are clear on the length of any delay.
"If we were to go down the general election route that would put a dampener on the pound, a hurdle preventing it from moving above $1.30," MUFG strategist Lee Hardman said, adding he does not now expect sterling to weaken too much below $1.30.
"Once the EU outlines its plans (for extension), after that the government will reveal their hand (on elections)".
Hardman also noted that weak economic data had dampened the Brexit cheer after weak business activity data earlier in the day and the new business index component of U.S. PMIs came in at the lowest in a decade.
In the UK, data this week showed the government was likely to miss a goal of keeping borrowing below the threshold of 2% of GDP, reflecting weakening public finances even before Brexit.
The Brexit optimism had led money markets to slash the chances of interest rate cuts next year but those estimates are creeping higher again, with a cut now 90% priced for December 2020, up from 60% a week ago BOEWATCH=.
(Reporting by Tommy Wilkes; Editing by Catherine Evans and Alexander Smith)
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