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UPDATE 1-Sterling surges after report Spain, Netherlands open to softer Brexit

Brexit@ (Adds quote, details)

LONDON, Jan 12 (Reuters) - Sterling on Friday rocketed to its highest level against the dollar since the vote to leave the European Union in mid-2016, after a report that the Netherlands and Spain were open to a softer Brexit deal for Britain.

The pound traded up more than one percent on the day at $1.3691, its highest since June 24, 2016, when the pound plunged after Britain voted to quit the EU.

The gains came after Bloomberg reported that the Spanish and Dutch foreign ministers had agreed to work together for a Brexit agreement that maintains close ties between the EU and Britain.

"I would suggest this 1/8sterling's jump 3/8 is purely because of news that the Dutch and Spanish are open to a softer Brexit," Neil Jones, Mizuho's head of hedge fund currency sales.

"It's not so significant as the rally would suggest. Just because two of the 27 members say this, it doesn't mean a softer Brexit will happen. It doubt it's as straightforward as that," he said.

Sterling struggled to hold on to the gains, falling back to $1.3659 by 1412 GMT. That left it around the same levels it was trading at before the report.

The FTSE 100 briefly fell into negative territory and touched its session low before rebounding.

Two-year gilt yields rose more than 5 basis points on the day to peak at 0.615 percent, their highest level since Jan. 4, 2016.

Five-year gilt yields rose more than 6 basis points on the day to 0.885 percent, matching the post-Brexit vote high of 0.885 percent set on Oct. 25.

"I'm sceptical this (report) is necessarily a game-changer at this stage as there will also be member states pushing the other way," said Nomura currency strategist Jordan Rochester. (Reporting by Jemima Kelly and Tommy Wilkes; additional reporting by Julien Ponthus and David Milliken, editing by Larry King)