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LONDON, April 3 (Reuters) - Sterling held below $1.31 on Wednesday as Prime Minister Theresa May sought a Brexit compromise with opposition leader Jeremy Corbyn in a last-ditch effort to end a national crisis.
The United Kingdom was supposed to leave the EU last Friday, but it is still unclear how or even whether it will exit the bloc.
May is holding talks with the Labour Party which sterling investors see as a gamble that could help a European Union divorce deal finally clear parliament or tear her ruling Conservative party apart.
In a series of votes on Wednesday evening a cross-party group of lawmakers will attempt to push through legislation to stop a no-deal Brexit, the biggest downside risk for the pound.
"A surge in expectations that the UK could be headed for a soft Brexit means sterling has leapt higher, but there is still uncertainty linked both to Brexit and the shape of the UK government," said Jane Foley, a currencies strategist at Rabobank.
May turned to Labour after a hardcore eurosceptic group of Conservatives repeatedly rejected her divorce deal.
Labour wants to stay in a customs union with the EU, raising the likelihood of a "soft" Brexit option that keeps Britain's economy closely aligned to the world's biggest trading bloc.
Sterling jumped to $1.3196, its highest level since March 28 on hopes that Britain could end up with close ties to the European Union after Brexit.
By 1500 GMT it was trading around $1.3155, up 0.2 percent on the day and against the euro it held near its strongest level since March. 27 at 85.03 pence.
May's cross-party effort by no means lifts the fog of uncertainty over the pound but offers a glimmer of hope to investors who are worried Britain might crash out of the EU without a withdrawal deal on April. 12.
The currency largely overlooked a downbeat survey of purchasing managers in the services sector, with the headline reading for March dipping into contraction territory to its lowest level since July 2016.
It is up more than 1.3 percent from Tuesday's low of $1.3015 when lawmakers' failure on Monday to agree an alternative plan to May's withdrawal agreement.
Expectations for big swings in the pound remained high, with one-month implied volatility holding near three-month highs, contrasting with a similar gauge for the euro, which has plummeted to a 4-1/2 year low.
(Reporting by Saikat Chatterjee and Tommy Reggiori Wilkes; Additional reporting by Dhara Ranasinghe; Editing by Mark Potter, William Maclean)