* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv
By Olga Cotaga
LONDON, Jan 2 (Reuters) - The pound was weaker on Thursday as the euphoria of December's election gave way to anxiety over the risk of a no-deal Brexit at the end of 2020.
Market liquidity was thin on the year's first day of trading, but the decline showed how worried traders were over Britain's trade negotiations with the European Union after its expected exit from the bloc at the end of this month.
The UK has a year to strike a trade deal. The deadline can be extended beyond December 2020, but Prime Minister Boris Johnson has said he will not ask for an extension, despite warnings it would be hard to agree a deal in just under a year.
The final reading of the British manufacturing purchasing managers' index contributed to the fall in sterling. It showed factory output fell in December at the fastest rate since 2012 as a tepid global economy hurt demand and businesses reduced inventories built up in case of a no-deal Brexit.
"The pound was the second worst performing G10 currency overnight amid thin liquidity as markets grow nervous that the recent rally in the pound was overdone," said Lee Hardman, currency analyst at MUFG.
"At the moment there is still significant uncertainty about the macroeconomic direction over the next few months and so we expect the pound could be more sensitive to data releases going forward," Hardman said. If sentiment improves and investment picks up, he said, "this would be positive for the pound."
Sterling was last down 0.3% at $1.3209, off its mid-December high of $1.3516 after the Conservative victory in the general election. That briefly reassured investors Britain would finally leave the EU after postponing its exit three times.
But implied volatility gauges in sterling were more elevated than they were for other major currencies, reflecting ongoing uncertainty over outcomes of trade negotiations between the UK and the EU this year.
British businesses reported a fall in Brexit-related uncertainty last month, according to a Bank of England survey that was conducted before and after the election on Dec. 12.
However, 42% of respondents said they did not expect Brexit uncertainty to be resolved until 2021 at the earliest, up from 34% in November, according to the BoE.
Reporting by Olga Cotaga