REFILE-UPDATE 1-Sterling awaits Brexit deal confirmation, approaches 2-1/2-year high

(Refiles to correct typo in lede)

* Graphic: World FX rates in 2020

* Graphic: Trade-weighted sterling since Brexit vote

LONDON, Dec 24 (Reuters) - Sterling rose to $1.36 on Thursday and was set to scale the 2-1/2 year highs hit last week as markets awaited confirmation that Britain and the European Union had finally clinched a deal to govern trade when the Brexit transition ends on Dec. 31.

The currency has strengthened some 1.5% versus the dollar since Reuters reported at around 1330 GMT on Wednesday, quoting sources, that a Brexit deal appeared imminent.

It is now around $1.3580, up 0.7% on the day, having briefly risen past $1.36 and heading towards the 2-1/2 year high of $1.3625 hit last week.

Against the euro, it was up 0.5% by 0900 GMT at 89.7 pence.

There is yet no official confirmation but sources say a deal is close as British Prime Minister Boris Johnson held a late-night conference call with his senior ministers, and negotiators pored over reams of legal texts.

Berenberg analyst Kallum Pickering said a deal would remove a major downside risk to the UK economy.

It would “unlock significant investment in UK and support the recovery once the ongoing coronavirus shock starts to fade as well as provide a positive backdrop for UK equities and sterling heading into 2021,” Pickering wrote in a note to clients.

While the pound and UK stocks have rallied strongly in recent weeks as optimism grew over a last-minute deal, the consensus is most UK assets remain undervalued and will gain further once a deal is confirmed.

Pound options also calmed, with one-week implied volatility, a gauge of expected swings -- at the lowest since Dec. 1 at 9.6%. It is down more than 7 percentage points since the first report of an imminent Brexit deal emerged on Wednesday.

FTSE mid-cap stocks, which are more oriented towards the domestic UK economy, rose 0.6% hitting the highest since February.

Asset manager Candriam told clients it was overweight UK domestic equities and sterling.

“UK equities are the ultimate value play. They should fully benefit from a relief if we find a Brexit agreement and from the recovery once we come out of the health crisis.”

The Brexit deal hopes have pushed UK 10-year government borrowing costs more than 10 basis points higher on Wednesday .

Yields have since slipped 1.5 bps, given the lack of fresh headlines and the pressure on the UK economy from Brexit and coronavirus-linked lockdowns.

Reporting by Sujata Rao and Iain Withers Editing by Rachel Armstrong and Karin Strohecker