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Pound hits 6-week low on Brexit fears, implied volatility curve inverts for first time in 6 months

* Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv

By Ritvik Carvalho

LONDON, Sept 9 (Reuters) - The pound fell to its lowest level in six weeks against the dollar on Wednesday as new legislation by the British government on the country's post-Brexit plans stoked fears of a derailment of trade talks with the European Union.

Britain will set out new details of its blueprint for life outside the bloc later on Wednesday, publishing legislation a government minister acknowledged would break international law in a "limited way", and which could sour trade talks.

Sterling has fallen 1.8% against the dollar since Friday as Britain steps up preparations for a "no-deal" Brexit, during which the head of the government's legal department has resigned.

The new legislation - the Internal Market Bill - will be scrutinized for its treatment of the Northern Ireland protocol which forms part of the Brexit withdrawal agreement. Prime Minister Boris Johnson's Northern Ireland minister, Brandon Lewis, said the new bill would "break international law in a very specific and limited way".

1-month sterling implied volatility hit its highest levels in nearly 5 months, at 10.4%, forcing the entire options curve to invert.

The pound fell to $1.2919, its lowest level since July 29, and down 0.3% on the day.

Against the euro, it traded at 90.91 pence.

Still, investors said the pound's downward move since Friday could stall.

"Sterling/dollar's 1.8% move lower since Friday has effectively priced in a large degree of short-term Brexit uncertainty — and further material downside requires more bad Brexit news to fuel the bearish pound momentum," said Viraj Patel, global macro and FX strategist at Arkera.

"We would need to see a material shift in the UK government’s stance towards a No Deal Brexit for pound spot markets to price in a bigger hard Brexit risk premium."

The EU has warned Britain that if it reneges on the divorce deal there will be no agreement. London has said it will respect the withdrawal agreement and Northern Ireland protocol.

Britain and the EU say they have until October to agree a free trade deal, which would ease the worries of companies who fear disruption at the borders and of supply chains.

"All eyes today are on the release of new UK legislation regarding the internal market and whether it seeks to re-write the Northern Irish protocol agreed with the EU last year," ING strategists wrote in a note to clients.

"The resignation of the government’s head of legal yesterday suggests the changes will be material and that sterling will stay vulnerable. $1.2870 looks a possible support level for cable today, however."

(Reporting by Ritvik Carvalho; additional reporting by Saikat Chatterjee, Editing by Timothy Heritage)