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CORRECTED-UPDATE 1-Sterling drops as EU's Barnier says just hours left for Brexit deal

(Corrects last paragraph to show Smarkets said the odds of a deal in 2020 are at 70%. A previous version wrongly said that referred to no-deal chances)

* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

LONDON, Dec 18 (Reuters) - Sterling fell on Friday, reversing some of its recent gains, after European Union chief negotiator Michel Barnier warned that there were just hours left to reach a Brexit trade deal with London.

The British currency is still on track for its best week since the end of July as market confidence has risen sharply this week on hopes that the European Union and Britain will clinch a last-minute trade deal ahead of a Dec. 31 deadline, when a Brexit transition period ends.

Almost a year after Britain formally left the EU, the two sides are in the final stretch of talks over a post-Brexit trade deal.

The pound hit 2-1/2 year highs above $1.36 this week, but Friday’s trading session served as a reminder that the two sides still have divergent ideas on how they want to build their post-Brexit relationship.

Barnier told the European parliament that the path to an agreement was “very narrow”.

“The latest comments are creating a little bit of doubt in markets, but most still see a deal as highly likely,” said Adrian Schmidt, head of FX strategy at Continuum Economics.

British Prime Minister Boris Johnson told European Commission President Ursula von der Leyen in a call on Thursday that it now looked very likely that an agreement would not be reached unless the EU position changed substantially.

Schmidt added that the latest comments from Johnson looked like “an attempt to wring concessions out of the other side at the last minute”.

Sterling weakened to as low as $1.3489 on Friday, before settling at $1.3518 at 1051 GMT, down 0.5% on the day.

Against the euro, sterling was down 0.3% at 90.67 pence .

“The pound corrected from its 2-year highs in early trading today but remains at levels that clearly signal a lingering optimism on a deal and GBP downside risk remains asymmetrically higher in case of no-deal,” ING analysts wrote in a note to clients, adding that a Brexit deal could still be agreed over the weekend.

Betting exchange Smarkets said the odds of sealing a deal in 2020 are slipping from above 80% earlier this week, but they are still at 70%. They were less than 50% at one stage last week. (Reporting by Joice Alves and Tommy Wilkes; Editing by Nick Macfie and Elaine Hardcastle)

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