The pound fell against the euro by nearly 1 per cent on Wednesday evening, after the EU gave Britain a 72-hour ultimatum to secure a trade agreement or prepare to crash out the bloc with no deal.
Prime Minister Boris Johnson met EU Commission President Ursula von der Leyen for a fish dinner in Brussels in Wednesday night, which lasted three hours, to break the deadlock in talks to secure a post-Brexit trade agreement.
Both sides agreed that negotiations had reached a stalemate over the weekend and political intervention was needed.
However, the sides were not upbeat after the "lively" dinner and "significant gaps" remained between them.
Ms von der Leyen said after the meeting that the EU and the UK remained "far apart" on a post-Brexit trade deal.
The pound against the euro dropped from 1.11 to 1.10 after the news that Sunday was agreed to be the hard deadline for Britain to secure an agreement with the EU.
Sterling dropped about 0.5 per cent against the dollar, to as low as $1.3311 and last stood at $1.3345. But it stayed above this week's low of $1.3225 set on Monday.
"It looks like there won't be any agreement to present to the EU summit starting today," Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank, told Reuters.
"Markets have been quite optimistic about a deal. I'm a bit surprised."
The pound had increased before the talks earlier on Wednesday.
Talks are expected to resume on Thursday as EU leaders meet in Brussels for the European Council, where both sides initially wanted a deal to be sealed.