* Lawmakers reject deal by 391 to 242
* Pound swings wildly in dramatic session
* Sterling volatility surges on uncertainty (Updates with outcome of vote, quotes)
By Tom Finn
LONDON, March 12 (Reuters) - Sterling held near the day's lows on Tuesday after a volatile trading session as Britain's parliament rejected Prime Minister Theresa May's deal to quit the European Union for a second time.
While the pound had weakened sharply against the euro and the dollar just before the result, it subsequently trimmed losses across the board after May said Wednesday's vote, when lawmakers will vote on whether Britain should exit the EU without a deal, would be a free one.
"One door has closed but other possibilities have opened up and markets are hopeful that Wednesday's vote on a no-deal Brexit will suffer a big defeat," said Timothy Graf, head of macro strategy at State Street Global Advisors in London.
Sterling which had earlier fallen to an intraday low of $1.3005, down nearly three cents from overnight highs, was trading at $1.3076, broadly near levels before the voting began.
Indeed, the pound nearly popped into positive territory at one point towards the end of New York trading hours during May's statement after the defeat.
Theresa May said she would allow her lawmakers to vote according to their own beliefs rather than along party lines on Wednesday, meaning members of the cabinet can vote against her and each other without having to leave the government.
"For now markets remain convinced that Parliament will act to rule out exiting with no deal – and tomorrow’s vote is likely to confirm this assumption," said Ranko Berich, head of market analysis at Monex Europe.
Against the euro, the British currency held near the day's low at 86.44 pence and just above a low of 86.53 pence.
Though the margin of defeat was less than the rejection of the previous version in January, it remained sufficiently large to rule out the possibility of May going back to the European Union to try to wring out further concessions.
“It’s finally time for Theresa May to admit her deal is past the point of no return," said Lee Hardman, currency analyst at global bank MUFG based in London.
But Tuesday's vote also meant that an array of possibilities open up including a second referendum or general elections - keeping general market volatility levels on the pound high.
The barrage of news over the last few hours over the progress of Brexit negotiations sent derivative markets into a tailspin with overnight gauges of expected moves in the pound spiking to its highest levels last seen immediately after the Brexit referendum vote in June 2016.
If lawmakers reject a no-deal exit on Wednesday, another vote would then be held on Thursday on whether Britain should request from the EU a limited extension of the March 29 Brexit date.
Traders are expecting big swings in the currency around this week's votes, according to a sharp rise in one-week implied volatility.
While overnight gauges of volatility have fallen back from earlier highs, they still remain elevated compared to historical averages.
Additional reporting by Alistair Smout, Sujata Rao, Tommy Reggiori Wilkes, Josephine Mason and Dhara Ranasinghe Writing by Saikat Chatterjee Editing by Frances Kerry