Sterling bounced briefly on Tuesday after Britain's Supreme Court ruled "unlawful" a decision by Prime Minister Boris Johnson to suspend parliament in the run-up to Brexit.
The pound rallied to $1.2489 as traders mulled the prospect that Britain could avoid a no-deal departure from the European Union on October 31, analysts said. The euro also slid versus sterling.
House of Commons speaker John Bercow said parliament must "convene without delay", adding that he will consult party leaders as a matter of urgency.
Johnson had insisted that the extended parliamentary recess was designed to allow time to bring forward a new legislative programme -- but critics accused him of trying to avoid lawmakers' scrutiny ahead of Brexit.
- Traders 'reassess no-deal Brexit' -
"Sterling bounced higher following the judgement, as pound traders once again reassess the probability of a no-deal Brexit being avoided," City Index Fiona Cincotta told AFP.
"With ministers heading back to parliament imminently, still five weeks ahead of 31st October, there is time to prevent a damaging disorderly Brexit."
The 11 judges of the country's highest court were unanimous in their verdict, which they said meant parliament could now immediately reconvene.
Johnson, who took office on July 24, had advised Queen Elizabeth II as head of state to prorogue parliament.
Most members of the House of Commons oppose Johnson's threat to leave the European Union next month even if he has not agreed exit terms with Brussels.
The pound later handed back some of its gains to stand at about $1.2440, up 0.1 percent from late Monday.
"Sterling is bouncing around as traders are wondering: 'What is next for UK politics?'" said CMC Markets analyst David Madden.
"A general election seems like the next move."
- 'Uncertainty is the norm' -
London's stock market bobbed into negative territory in late Tuesday morning deals, reversing earlier losses, but Frankfurt and Paris held onto gains.
"It’s hard to see how this gets the UK and EU any closer to a deal that will be approved by MPs, but it does really deliver a massive blow to Boris Johnson," added Market.com analyst Neil Wilson.
"It's perhaps not fatal, but it's not going to make life any easier and we are now faced with significant uncertainty of a different hue.
"I would simply suggest that the uncertainty is the norm now -- we just have a different vector of uncertainty to contend with," Wilson added.
In Asia meanwhile, equities crept higher Tuesday but dealers remained on edge following contrasting global economic data as investors await developments in the China-US trade standoff.
Top-level negotiations are due to start in Washington next month.
- Key figures around 1030 GMT -
Pound/dollar: UP at $1.2452 from $1.2429 at 2100 GMT
Euro/pound: DOWN at 88.30 pence from 88.45 pence
Euro/dollar: DOWN at $1.1099 from $1.0993
Dollar/yen: UP at 107.74 yen from 107.55 yen
London - FTSE 100: DOWN 0.1 percent at 7,318.75 points
Frankfurt - DAX 30: UP 0.1 percent at 12,351.51
Paris - CAC 40: UP 0.2 percent at 5,644.36
EURO STOXX 50: UP 0.2 percent at 3,544.48
Tokyo - Nikkei 225: UP 0.1 percent at 22,098.83 (close)
Hong Kong - Hang Seng: UP 0.2 percent at 26,281.00 (close)
Shanghai - Composite: UP 0.3 percent at 2,985.34 (close)
New York - Dow: UP 0.1 percent at 26,949.99 (close)
Brent North Sea crude: DOWN 1.3 percent at $63.94 per barrel
West Texas Intermediate: DOWN 1.1 percent at $58.02