Sterling had been at 3-week highs after enjoying its best day since March, as traders waited for news from a meeting between British Brexit Secretary Stephen Barclay and the European Union's chief negotiator Michel Barnier.
It had been lifted on Thursday after British Prime Minister Boris Johnson and his Irish counterpart Leo Varadkar had said they saw "a pathway to a possible deal".
But it tumbled to $1.2409 in a matter of minutes from just above $1.25 on Tusk's comments, before recovering back to $1.2480 as his comments unfolded, talking about "promising signals" from Varadkar that a deal was possible.
Versus the euro, the pound also dropped off a near a three-week high, sliding to 88.03 to 88.67 pence in less than a minute.
The moves could be another reflection of currency markets increasing propensity to move violently in either direction in the space of seconds on unexpected headlines, thanks to the growing use of computer-generated models, or algorithms, for trading.
One dealer in London attributed the swings to "algos" in a headline-driven market. A far bigger move, dubbed a "flash crash" occurred in January when the dollar and Australian dollar fell by more than 4pc in a few minutes against the yen.
Kenneth Broux, FX strategist at Societe Generale, said there was a scramble to cover positions given the newfound optimism that a Brexit deal would be reached.
"We've seen quite a bit of volatility this morning after the meltup yesterday. The market is very thin. I think it's very important to specify that sterling liquidity is very thin so volatility is high," Broux said.
But he added that given the broadly bearish positions in sterling markets, "the obvious conclusion is that we'll see a squeeze higher".
Futures data last week showed that positions betting against the pound had eased but there were far more negative bets than positive ones
The pound recovered soon from its blip and by 0930 GMT traded half a percent higher at $1.2495 and against the euro stood 0.3pc up at 88.18 pence.
DEADLINE
Hopes are that British and EU negotiators' meeting will pave the way for a Brexit transition deal at an Oct. 17-18 summit. . But some are sceptical Johnson will succeed in getting the agreement past Britain's parliament
"If the meeting doesn't go too badly you may get a further pop (higher in sterling) but it will be a matter of hours for the ERG and DUP to opine on it," said Tim Graf, head of macro strategy at Slate Street Global Advisors, referring to the pro-Brexit faction of the British Conservative party and the Northern Irish party which supports the UK government.
"If there's an endorsement the rally can continue," Graf added. "But the reality is the extreme Brexit camp seem to be coming to the view that no-deal is the way forward and whatever deal is passed won't be good enough for them."
Thursday's peak of $1.2469 was the pound's largest intraday percentage gain against the dollar in seven months and the biggest against the euro since March in the run up to the previous Brexit deadline date.
Deutsche Bank's forex strategist George Saravelos said he is "turning more optimistic on Brexit" and no longer negative on the pound, while JPMorgan too said the Anglo-Irish statement may have "changed everything".
It is on course for its second week of gains against the dollar and its first weekly rise against the euro in three.
Surging demand for one-month risk reversals, the contract covering the Oct. 31 Brexit deadline, also reflected rising optimism on the possiblity of a Brexit deal. .
The sterling rally undermined UK's export-heavy FTSE 100 stocks index but domestically focused UK retailers, banks and housebuilders benefited, rising 4pc- 6pc. Irish stocks also rallied 3pc while Irish government bond yields fell as much as 10 basis points.