The British pound erased earlier losses against the dollar on Thursday after a German newspaper Handelsblatt reported the United Kingdom could stay in the European Union for another two years.
Sterling traded 0.42 percent higher at $1.3276 versus the greenback.
"This maybe eases the tensions in the negotiations and gives people more time to adjust," said Peter Boockvar, chief market analyst at The Lindsey Group. "At the same time, some people just want this thing to be over with, and this does not help that."
The pound had earlier tumbled, hitting as low as $1.3122, after the European Union's chief Brexit negotiator, Michel Barnier, said talks around Britain's divorce payment had become deadlocked.
Handelsblatt reported that the EU's offer is tied to the U.K. meeting all of its obligations as a member country, but giving up its voting rights.
Last year, the United Kingdom held a referendum in which most voters voted in favor of the U.K. leaving the European Union.
U.K. Prime Minister Theresa May triggered Article 50 earlier this year, which officially began negotiations with the EU.
— Reuters contributed to this report.