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Sterling falls after Brexit bill opposed by EU passes UK parliament

* Graphic: World FX rates in 2020

* Graphic: Trade-weighted sterling since Brexit vote

LONDON, Sept 30 (Reuters) - Sterling fell on Wednesday after Britain’s lower house of parliament approved legislation on Tuesday that gives ministers the power to break its divorce agreement with the European Union.

The UK Internal Market Bill, which ministers acknowledge breaks international law, was approved by 340 votes to 256 in the House of Commons and now passes to the House of Lords for debate.

Sterling’s decline was small; the bill’s passage was expected and market participants have increased their expectations of a Brexit deal.

“A deal conquers all in regards to the Brexit negotiations,” said Neil Jones, head of European hedge fund sales at Mizuho.

“The Internal Market Bill passing through the House of Commons was business as expected. So far, it has gone according to market expectations. What has put the bill on the side temporarily is the expectations of a deal between the EU and the UK.”

When the Internal Market Bill was initially proposed it coincided with high chances of a no-deal Brexit. Now that those fears have diminished, so did the worries around the harmful effects of the bill on the Withdrawal Agreement.

The government says clauses in the bill which override the Withdrawal Agreement will only be used if talks on a border solution with the EU fail. If a deal can be reached on the Irish border, the powers may not be needed.

A resurgence in COVID-19 cases also drew attention away from the bill.

“When you factor the impact on market, sometimes what was previously a major factor falls to second stage,” said Jones.

British Prime Minister Boris Johnson will hold a news conference on COVID-19 on Wednesday as he grapples with a second wave of the novel coronavirus outbreak.

Britain, which has the worst official death toll in Europe, reported 7,143 new cases of coronavirus on Tuesday, the highest single figure to date, and 71 deaths, the worst daily toll since July.

Brexit negotiations continue this week in what is so far the last leg of talks before an EU summit next month.

Meanwhile, Norway and Britain have reached a bilateral agreement on fisheries, the Norwegian government said on Wednesday, before Britain leaves the EU at the end of the year.

The British pound was last trading down 0.3% versus the U.S. dollar at $1.2817, after reaching earlier its lowest since Monday. Versus the euro, sterling fell 0.2% at 91.55 pence. (Reporting by Olga Cotaga, editing by Larry King)