The pound jumped to a two-month high on hopes that Brexit negotiations could progress to trade talks following reports that the UK has agreed to pay as much as £50 billion to settle its EU divorce bill.
Sterling was up 0.5% against the US dollar at 1.340 in morning trading, marking its highest level since the end of September, and rose 0.2% versus the euro to 1.129.
Investors were taking reports of the higher offer as a sign there could finally be a breakthrough in talks between British and EU officials.
But Michael Hewson, chief market analyst at CMC Markets UK, said the Irish border issue could still pose a challenge.
"While one obstacle looks to have been cleared it remains to be seen whether the Irish government will follow through on their threats to veto further progress unless certain guarantees are met with respect to the border issue."
The UK Government has insisted it does not want to see a hard border between Ireland and Northern Ireland, but it is one of a number of issues that could derail the pound's upward trajectory.
Neil Wilson, a senior markets analyst at ETX Capital, said there are also questions over whether Prime Minister Theresa May can get fellow Conservatives on board with the new Brexit bill figure, as well as worries over EU citizens' rights.
However, he noted that the divorce bill was "the single biggest obstacle" to Brexit talks and the progress "vastly improves the chances of an orderly transition".
"In this regard we can see developments as positive for the pound - the reduced risk of a hard Brexit, reduced risk of domestic upheaval in the form of a fresh general election and Labour victory, and the stronger likelihood that a transition deal will be engineered in the nick of time."
The stronger pound weighed on the FTSE 100, as many of its listed multinational firms tend to benefit when the UK currency is weaker.
The blue chip index was down 0.5% at around 7,422 points, leaving it lagging behind its European peers including the French Cac 40 and German Dax, which were up 0.5% and nearly 0.7% in morning trading.
In oil markets, Brent crude prices were down nearly 0.2% at $63.21 per barrel as investors fretted over whether Opec and other major producers like Russia would end up striking a deal that would extend production cuts and help battle bloated supplies.
It comes ahead of the Opec meeting in Vienna on Thursday.
In UK stocks, London Stock Exchange Group shares were down more than 2% or 81p to 3,719p after it announced that chief executive Xavier Rolet was stepping down with immediate effect due to "unwelcome publicity" amid a mounting row over succession plans for the top job.
Mr Rolet has been replaced by chief financial officer David Warren at the helm, while chairman Donald Brydon said he would not stand for re-election in 2019.
Shares in Cineworld plunged more than 15% to 588p as it confirmed it was in advanced discussions with US cinema chain Regal over a $3.6 billion (£2.7 billion) takeover.