The blue chip FTSE 100 index <.FTSE> was down 0.2 percent by 1637 GMT, having touched a fresh all-time high of 7,354.14 points earlier in the session.

The more domestically-exposed FTSE 250 index <.FTMC> fell 0.4 percent.

Sterling dropped below $1.20 to a three-decade low against the dollar, barring its October "flash crash", following media reports that Prime Minister May will signal a "hard" Brexit for Britain from the European Union in her speech on Tuesday.

A "hard" Brexit scenario would prioritise immigration controls and bilateral trade deals that would see Britain leaving the EU's single market and customs union.

A weak sterling benefits the FTSE 100's international, dollar-earning firms, giving them a currency-related accounting boost. In 2016, the FTSE 100 was the best performer among major regional indexes in Europe, gaining more than 14 percent.

"It certainly feels like the FTSE is currency led at the moment, so we may see some currency movement on the downside [tomorrow]," said Mark Ward, head of trade execution at Sanlam Equities.

"Although, again, it does feel like we are now reaching extreme bear levels in Sterling, so any hint of remaining in the customs union could prompt some pound short covering and stage a decent rally."

Investors also anticipate news of plans for a transition deal with the EU to ease businesses through the process of adapting to a new trade regime once Britain formally exits.

While the weak sterling has been fuelling successive record highs for the index, banks, which had contributed to the FTSE's rally, pared back on worries over the consequences of a 'hard' Brexit for their ability to sell products in the EU.

Insurance stocks <.FTNMX8570> were the worst performers, down 1.7 percent, with Prudential (>> Prudential plc) and Standard Life (>> Standard Life Plc) both down more than 2 percent.

Banking stocks <.FTNMX8350> also dragged on the index, with Royal Bank of Scotland (>> Royal Bank of Scotland Group plc) bottom of the FTSE, down 2.8 percent after Goldman Sachs downgraded it to "neutral" from "buy". Lloyds Bank (>> Lloyds Banking Group PLC) and Barclays (>> Barclays PLC) were also in the red.

Mining companies were among the biggest risers among the blue chips, with Rio Tinto (>> Rio Tinto plc), Anglo American (>> Anglo American plc), and Glencore (>> Glencore PLC) all up between 1.6 percent to 2.1 percent. Precious metals miners Randgold Resources (>> Randgold Resources Limited) and Fresnillo (>> Fresnillo Plc) both rose around 1.6 percent, helped by a firmer gold price.

(Reporting by Kit Rees; Editing by Ralph Boulton)

By Kit Rees and Helen Reid