Sterling drops as Brexit talks move to second round

* Graphic: Sterling and gilt yields http://bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv (Adds details, quotes)

By Saikat Chatterjee and Tommy Wilkes

LONDON, Dec (Shanghai: 600875.SS - news) 15 (Reuters) - Sterling fell nearly a percent on Friday despite news that Brexit negotiations would move on to the next stage in January, as investors booked some profits following recent gains.

The European Union agree to move talks forward with London on Britain's exit from the bloc, but there was little clarity on trade issues and Austria warned the Irish border issue remained a "riddle".

With U.S. stocks headed higher and the dollar scoring some gains against the Swedish crown and the Australian dollar, investors were quick to take profits on long sterling trades even with the positive news out of Brussels.

"It's a bit of head scratcher," said Lee Hardman, a currency analyst at MUFG.

Sterling rose nearly 4 percent last month as investors cheered the progress of the Brexit negotiations, though a struggling economy and caution around the outlook of the second round of negotiations spurred profit taking in thin December trading.

Hardman said slow end-of-year flows, combined with some likely disappointment that Brexit-related progress had not pushed the pound higher, had encouraged some profit taking.

Sterling reversed earlier gains and fell 0.9 percent on the day at $1.3307 and nearing a two-week low of $1.3305 hit earlier this week. The fall, at its lowest level to 1.3319, was the biggest intra-day drop since early November.

The pound had rallied on Thursday after solid economic data.

Against the euro, the British pound fell 0.7 percent 88.37 pence per euro.

With (Other OTC: WWTH - news) little support from the Bank of England (BoE (Shenzhen: 000725.SZ - news) ), which on Thursday stuck to its view that interest rates were likely to rise only gradually despite above-target inflation, the key drivers for sterling are likely to be Brexit-related.

"This seems to be so much of a "buy the rumour, sell the fact story in sterling," said John Marley, head of FX strategy at Infinity International, a currency risk management firm.

The BoE said in a statement that last week's breakthrough in Brexit talks had reduced the risk of Britain leaving the EU in a disorderly way and might boost economic confidence.

Investors have turned slowly bullish on sterling in recent weeks, with net positioning data showing a gradual increase in long British pound bets, though any disappointment over Brexit negotiations may see sterling skid sharply lower. (Reporting by Tommy Wilkes and Saikat Chatterjee; Editing by Keith Weir)