Italian borrowing costs have hit fresh four-and-a-half year highs after the European Union criticised Italy's draft budget.
The European Commission said the proposed budget - which would lead to a bigger deficit - was an "unprecedented" breach of EU fiscal rules.
Worries over a potential impasse between the Commission and Italy have been rattling the markets for some weeks, and on Friday morning the yield on Italy's benchmark 10-year bonds climbed to 3.74%, the highest rate since February 2014.
The pound has slipped a third of a cent to trade at $1.3111 after Brexit talks between the UK and the EU faltered over the Irish border.
Sterling is also down a third of a cent against the euro, at €1.1352.
Kathy Lien, managing director of foreign exchange strategy at BK Asset Management, says: "The clock is ticking and a deal is drawing close but having been burned by false hopes, investors are ignoring the conflicting headlines and waiting for official confirmation."
Sterling has hit a four month high against the euro, up 0.21%, at €1.1462, on hopes that the UK can soon agree a Brexit deal with the European Union.
However, Kengo Suzuki, chief FX strategist at Mizuho Securities, cautioned: "We can't be too optimistic about the Brexit process, because even if a deal can be struck at an anticipated special EU summit in November, it has to get through the British Parliament."
The pound has trimmed gains against the dollar and is now trading up 0.10% at $1.3156.
The pound is back above $1.30 after rising 0.17%. It is trading at $1.3043 against the dollar.
Sterling is also ahead of the euro, up 0.12% at €1.1323.
The pound is trading higher against both the dollar and the euro following a report in the Financial Times that Ireland is backing Theresa May's plan for an all-UK customs union with the EU.
Sterling is up 0.29% against the dollar at $1.2979.
It is ahead 0.15% against the euro at €1.1288.
Analysts at Mitsubishi UFJ Financial Group said: "The EU would have to provide some encouragement as well that it is warming to the idea for the pound to stage a rally in the coming weeks."
The pound has dipped under $1.30 against the dollar amid conflict within the government over Prime Minister Theresa May's Brexit plan.
It is currently trading at $1.2973. Sterling is also marginally down against the euro at €1.1230.
The pound has fallen to a three-week low as fears continue about the conflict over Theresa May’s Brexit plan.
Money traders' eyes remain glued to the growing divisions on show at this week's Conservative Party conference.
The pound has fallen to £1.1243 against the euro and $1.2960 against the dollar.
Sterling is now down 0.31% against the dollar at $1.3038 after data from the Office for National Statistics reduced annual GDP growth to 1.3% and said business investment had dropped.
Mark Gregory, chief economist at accountancy firm EY, said: "Investment is being tightly controlled with spend directed to keeping things going but not to expansion. UK is going to lose out on future growth."
Conversely, the pound extended its gain against the euro by 0.24% to €1.1260.
The euro is weakening against the pound, the dollar and the yen following the announcement of an agreement over the Italian budget overnight.
It slipped below $1.16 to $1.1591 and to 88p, making the pound worth €1.1259.
The populist Italian government intends to set the deficit at 2.4% of GDP - wider than had been expected and more than Brussels is thought to have wanted.
Italian government bonds are also being hit.
"The immediate market reaction has not been kind on Italian assets, and rightly so. Italy is now on a crash course with Brussels and the European Commission will no doubt be critical," said Andrea Iannelli, investment director of Fidelity International.
The pound has dipped on the dollar to below $1.31.
Sterling is now trading at $1.3067 but is up 0.10% against the euro at €1.1244.
The dollar has been powered by the recent interest rate rise by the US Federal Reserve but investors are also cautious about Brexit talks and the prospect of no deal.