The pound soared nearly 3% while £27 billion was wiped off the FTSE 100, after British Prime Minister Theresa May used a major speech to detail priorities ahead of Brexit negotiations.
Sterling rose more than 2.8% against the US dollar to 1.238. Against the euro, sterling rose 1.8% to 1.156.
It shaved 106.75 points off the FTSE 100, which closed lower by 1.46% at 7,220.38 points, marking biggest one-day spill since June 27 when the index fell 2.55% in the wake of the Brexit vote.
Sterling strength tends to negatively affect multinational stocks on the blue chip index, which benefit when international currencies are stronger.
Markets were reacting to a much-anticipated speech from Mrs May who set out 12 key objectives for EU withdrawal, and confirmed the Brexit agreement between Britain and the EU would have to navigate both Houses of Parliament before coming into force.
She also announced Britain will not hold on to membership of the European single market, but would aim to achieve the “greatest possible access to it” through a “bold new free trade agreement”.
Across Europe, the French Cac 40 fell 0.46% and the German Dax dropped 0.13%.
In oil markets, Brent crude prices rose by 0.38% to 55.87 US dollars per barrell, with international investors taking advantage of cheaper dollar-denominated commodities like oil as the greenback weakened against a basket of currencies.