UPDATE 1-Trade-weighted sterling hits 6-month high on EU deal optimism

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LONDON, Nov 30 (Reuters) - Sterling strengthened to a six-month high on a trade-weighted basis on Thursday, as hopes grew of a deal between Britain and the European Union at a summit next month.

EU leaders are preparing to offer a two-year Brexit transition deal as early as January after negotiators were close to a deal over the Northern Ireland border, The Times newspaper said on Thursday, citing EU sources.

Avoiding a so-called “hard border” on the island of Ireland that many fear could disrupt the peace in Northern Ireland is the last major hurdle before talks can move to negotiations on Britain’s future trade relationship with the bloc.

The pound climbed on the news, gaining as much as 0.7 percent against the euro to hit a three-week high of 87.76 pence .

Those gains helped pull up the Bank of England’s trade-weighted sterling index, which tracks the British pound’s effective exchange rate, to 78.8, its highest since May 19.

“Sterling soared after the Times reported that negotiators are close to a breakthrough on the difficult problem of the Irish border,” said ACLS Global strategist Marshall Gittler.

“The news triggered a lot of stops that pushed the currency higher. This would be tremendously bullish for sterling.”

Against the dollar, sterling was up around 0.4 percent at $1.3460, having earlier touched a nine-week high of $1.3480.

Brexit supporters accused Prime Minister Theresa May on Wednesday of being far too weak with the European Union after reports that she is ready to pay what Brussels is demanding to settle the divorce bill to leave the bloc.

But investors have welcomed the higher offer from may, with many fearing a “disorderly Brexit” - one without a deal - could spook financial markets, sow legal chaos and harm the British and EU economies by disrupting trade ties and cross-border supply chains.

“A key short-term downside risk appears to be abating,” wrote UBS macro strategist Lefteris Farmakis, in a research note on Thursday.

“Now the prospect for a fairly long and smooth transitional period has emerged. Should a transition deal be confirmed, downside risks for the currency will be firmly pushed back in time. And equally, the alleviation of imminent tail risks should support sterling, at least in the short term.”

Reporting by Jemima Kelly and Saikat Chatterjee, Editing by William Maclean