LONDON, Sep 8 (Reuters) – Sterling sank to two-week lows against the dollar on Tuesday, extending losses as fears grew that Britain is preparing to undercut its Brexit divorce treaty and potentially torpedo its trade talks with the European Union.

The latest round of negotiations starts on Tuesday but the EU has warned there there will be no trade deal if Britain tries override parts of the Brexit Withdrawal Agreement it signed in January, jeopardising the whole treaty and creating frictions in British-ruled Northern Ireland.

Tensions have flared anew even as clock ticks down to an October deadline for a new deal and then the end of the status-quo transition arrangement in late December.

“I sense participants are turning bearish on elevated chances of a no-deal Brexit but do not have a short position or hedge on board to reflect the view,” Neil Jones, head of hedge fund sales at Mizuho, said.

“We should be in store for a further pound selloff.”

The pound slipped more than 0.3% at $1.3125 by 0745 GMT while against the euro it touched 0.90 pence, also a two-week low.

Implied sterling-dollar volatility also rose, with one-month volatility, the contract encompassing the early-October deadline for a deal, reaching 10% for the first time since mid-June.