Sterling fell as much as 0.5% to $1.3193, its lowest level against the dollar in three months and its first break below $1.32 since late June, before trading 0.3% lower at $1.3225. European markets were unsettled by concerns that oil prices above $100 a barrel, prolonged by a Middle East war, could reinforce inflation and keep borrowing costs high. The FTSE 100 fell as much as 2%, while British 30-year gilt yields topped 6% for the first time since early 1998, with four weeks remaining before the Autumn Budget. AJ Bell investment director Russ Mould said the sharp rise in borrowing costs posed a major challenge for Prime Minister Andy Burnham and Chancellor John Healey's spending and borrowing plans. Burnham has proposed pension changes to fund universal social care and said he would welcome debate about closer UK ties with Europe. ING strategist Chris Turner said any eventual move to rejoin the European Union could support sterling, although clarity remained years away, and pointed to a UK-EU summit expected around November 20.