Sterling holds below two-month high, traders eye retail sales data

* Graphic: World FX rates in 2018

* Graphic: Trade-weighted sterling since Brexit vote

LONDON, Sept 20 (Reuters) - Sterling firmed versus the dollar on Thursday, half a cent below two-month highs, buoyed by optimism that Britain and the European Union can make significant progress towards a Brexit deal at an EU leaders summit.

The pound was also helped by broad dollar weakness, while traders are preparing for August British retail sales data, due at 0830 GMT.

Investors have pushed up the pound to its highest since July this week as they grow confident that a Brexit trade deal - helping Britain to avoid a disorderly and messy exit from the EU - can be clinched in the coming months.

Cabinet Office minister David Lidington said on Thursday Britain was more than 85 percent of the way to agreeing a deal.

But there remains a way to go. Prime Minister Theresa May, speaking at the EU leaders summit in Salzburg in Austria on Wednesday, urged her EU counterparts to drop “unacceptable” Brexit demands that she said could rip Britain apart.

The pound rose 0.3 percent to $1.3180 versus the dollar, below the two-month high of $1.3215 hit on Wednesday.

Against the euro, the British currency was flat at 88.795 pence, but close to its strongest level since early August.

“On we go with Brexit talks as the EU summit in Salzburg tries both to be tough on the UK and get a deal onto the table,” said FX strategists at Societe Generale.

“The Irish border issue remains the chief stumbling block to a deal, while the EU prepares for a November summit where it hopes an agreement will be sealed. EUR/GBP is for now clinging onto the uptrend support line drawn from the April low.”

British retail sales data is forecast to come in at a fall of 0.2 percent in August and up 2.3 percent year-on-year, according to a Reuters poll of analysts. (Reporting by Tommy Wilkes; Editing by Angus MacSwan)