(Adds comment, background)
LONDON, Sept 1 (Reuters) - Sterling steadied above $1.29 on Friday, gaining back some initial losses in morning trade in London after the PMI index of sentiment among manufacturers came in well above forecasts.
The pound had lost around up to a third of a percent in early deals before recovering to trade briefly in positive territory after the survey's publication. By 0917 GMT, it was just 0.1 percent lower on the day at $1.2923.
Against the euro it was less than 0.1 percent weaker at 92.12 pence.
The survey showed Britain's factories grew a lot more strongly than expected in August as work flowed in from home and abroad, suggesting the economy might be picking up speed after a slow first half of 2017.
That comes, however, after growing nerves around the Brexit process helped drive the pound's biggest monthly fall in trade-weighted terms since last October.
"The PMI surprised on the upside, but the reaction is very muted. That tells you a lot," said Thu Lan Nguyen, a strategist with Commerzbank in Frankfurt.
"Yes manufacturing in particular has been holding up extremely well. But what is more important is the medium to long term outlook for the economy which is quite uncertain."
Chief EU negotiator Michel Barnier said on Thursday after four days of talks that Britain's withdrawal negotiations with the European Union had failed to make the kind of progress needed to move into a new phase in October.
That leaves businesses and financial markets still faced with the risk of a "cliff-edge" fall into complex World Trade Organisation tariffs and procedures in March 2019.
Britain has raised the prospect of a transition period to smooth out the country's departure from the trade bloc, but the EU says it will not discuss future arrangements until more progress has been made a number of initial issues.
"Until the cliff-edge Brexit risk associated with March 2019 is removed, the pound will not be in a position to advance notably," analysts from Japan's MUFG said in a note on Friday. (Reporting by Patrick Graham; Editing by Keith Weir)