Sterling inches higher as dollar's gains fade

* Graphic: World FX rates in 2019

* Graphic: Trade-weighted sterling since Brexit vote

LONDON, Jan 6 (Reuters) - Sterling held around $1.31 on Monday as tensions in the Middle East encouraged buying of safe-haven currencies and curbed demand for the likes of the British pound, while investors awaited a parliamentary debate on Brexit legislation.

Investors remain cautious about political uncertainty as Britain prepares to leave the European Union and begins negotiations with the EU over their future trading relationship.

The UK parliament returns on Tuesday and will debate the Brexit bill, which includes a clause ruling out any extension of the transition period for trade talks beyond December 2020.

The pound rose 0.3% to $1.3113 in early trading on Monday but remains below levels of above $1.32 seen last week.

Sterling fell Friday after the United States assassinated the Iranian general Qassem Soleimani, panicking investors and boosted demand for safe-haven currencies, including the dollar.

Against the euro, the pound rose 0.1% to 85.26 pence .

Investors are also eyeing a final December reading for the Purchasing Managers Index, due at 0930 GMT. Economists polled by Reuters expect a reading of 49.1.

“Today’s December services PMI is expected to be unrevised from the provisional reading. The provisional PMIs for January (out Jan 24) will be more interesting as they will shed some light on the potential for a rebound in activity early in 2020 as political uncertainty cleared following the election,” RBC Capital Markets currency strategist Adam Cole said. (Reporting by Tommy Reggiori Wilkes, editing by Larry King)