* Sterling rallies as PM May forges ahead with Brexit
* Currency still vulnerable to major swings, analysts
* Dollar and yen bid as investors rush to safe haven assets
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Tom Finn
LONDON, Nov 16 (Reuters) - The British pound clawed back losses on Friday as Prime Minister Theresa May clung to her Brexit plan after the resignation of key ministers threw the divorce deal into doubt.
Sterling on Thursday suffered its worst day versus the euro since 2016 after Brexit minister Dominic Raab resigned, leaving investors panicking that Britain could soon exit the European Union without a trade agreement.
But the pound rallied nearly half a percent on Friday as May struck a defiant tone and vowed to take Britain out of the European Union in March as planned.
Sterling has see-sawed on Brexit news since the referendum. It rose when May struck a deal on Tuesday but has since fallen two and half cents to $1.2788.
Analysts said the currency would remain under pressure so long as the risk of further resignations threatens to further isolate May and raise the prospect of a leadership challenge.
“As long as ‘no deal’ remains as likely as it is, there is a risk of a sterling depreciation spiral that is self-intensifying,” said Ulrich Leuchtmannan, an FX strategist at Commerzbank in Frankfurt.
“Sterling volatility has woken up from its 100-year slumber and is likely to remain reactive,” he added.
Without a deal, the UK would move in March from seamless trade with the EU to customs arrangements set by the World Trade Organization for external states, which could cause panic in financial markets.
Both the dollar and the yen benefited from the deepening crisis for in Britain.
The euro rose 0.2 percent to trade at $1.1356. Investors were hopeful after reports out of Italy said that Italian Prime Minister Giuseppe Conte was looking to work with the EU over his government’s 2019 budget, which has been rejected by Brussels.
The single currency has gained over the last three trading sessions, but was up only 0.1 percent versus the dollar month to date, underscoring the strains from weakening economic momentum in Europe, Italian budget woes and the Brexit uncertainty.
The dollar index .DXY, a gauge of its value versus six major peers, was down 0.1 percent at 96.81, not far off a 16-month high of 97.69 hit at the start of the week.
Currency markets were also keeping an eye on the U.S.-Sino trade tensions as traders looked for concrete signs the economic powers were seeking to de-escalate their dispute.
A Financial Times report said U.S. Trade Representative Robert Lighthizer has told some industry executives that another round of U.S. tariffs on Chinese imports has been put on hold. But a U.S. Trade Representative spokesperson later denied this report.
Most analysts forecast the dollar to remain well supported in coming months thanks to the Federal Reserve’s commitment to continue to gradually raise interest rates. A fourth hike for this year is expected next month, backed by a robust economy and rising wage pressures.
The safe-haven yen was well bid, changing hands at 113.28, up 0.3 percent on the day, as the Brexit turmoil drew investors toward the Japanese currency. The yen had hit a six-week low of 114.20 on Monday before reversing course. (Additional reporting by Vatsal Srivastava, Editing by William Maclean)