* Parliament set to sit on Wednesday after court ruling
* Sterling rallies 0.5% to $1.25
* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Writes through, adds quote, details)
By Olga Cotaga
LONDON, Sept 24 (Reuters) - Sterling gained on Tuesday after the UK Supreme Court ruled that Prime Minister Boris Johnson's decision to suspend parliament was unlawful, but uncertainty over a possible general election and the eventual Brexit outcome capped its rise.
Some investors bet that the court's decision would reduce the probability of Britain leaving the European Union without a transaction agreement on Oct. 31. Others said it was virtually impossible to predict where things were headed.
Sterling looks "untradable" for the time being, Stephen Gallo, European head of FX strategy at BMO Capital Markets, said, adding that he expected the currency to trade within a range of $1.20-1.25.
The pound has rallied this month from a three-year low of below $1.20, but it's faltering as doubts return about what happens next. Most investors agreed the court's decision made it harder for Johnson to suspend parliament again, helping the currency push higher.
By 1405 GMT, the British currency was up 0.6% at $1.2504 , having hit $1.2582 last week. Against the euro, sterling rose by 0.4% to 88.075 pence.
"Our base case is still that new elections will take place sooner rather than later, but we are clueless as to what path UK politics will take in order to bring us there. The same holds for Brexit," Gallo said.
British bond yields rose after the ruling, then slipped back to around flat. London's blue-chip share index fell.5%, but a JPMorgan index tracking companies that get most of their revenues in Britain rose 0.4%.
The court said the decision to suspend parliament was illegal and that "immediate steps" for parliament to resume should be taken "as soon as possible". House of Commons Speaker John Bercow said the lower house would sit on Wednesday.
"What do MPs do with the extra time? I don’t think it changes the big picture," said Hetal Mehta, senior European economist at Legal & General Investment Management. "It feels like suspended animation ... We're neutral sterling."
Three years of Brexit twists and turns have made it hard to profit from trading the pound. Nervous investors are buying protection against unexpected moves in sterling, sending one-month implied volatility gauges -- which span the deadline for Johnson to find a Brexit deal -- to a three-week high .
The gauge slipped after the ruling.
Johnson said he suspended parliament suspension - from Sept. 10 until Oct. 14 - to allow his Conservative government to bring in a new legislative agenda.
He was defiant after the ruling, reiterating that his aim was to take Britain out of the EU on Oct. 31. A source said he was not planning to resign,
UBS Wealth Management told clients the court decision only reinforced belief a no-deal Brexit on Oct. 31 was unlikely.
"We still see upside for the pound and are overweight it versus the U.S. dollar in our FX strategy," they wrote.
Additional reporting by Tommy Wilkes and Josephine Mason; editing by Larry King