The pound has briefly fallen to a 14-month low against the euro on fresh doubts over the UK economy's resilience in the face of a global credit squeeze.
A cut in UK interest rates could weaken the British pound
At one point, the pound was trading at 68.58p to the euro, after the Bank of England offered emergency help to UK mortgage lender Northern Rock.
The move has led to fears that other banks could have to seek similar aid.
To ease panic in the financial system, the Bank of England could delay raising rates, further hitting the pound.
The pound rose slightly in later trading to 68.99 pence, while the euro hovered just below record highs against the dollar set on Thursday.
The euro has gained momentum as currency investors bet that the European Central Bank will raise its key interest rate of 4% by December this year.
The move is expected as the central bank has made it clear that keeping inflation under control is a priority as the bloc's economy continues to expand at a steady pace.
In contrast, analysts have abandoned expectations of another interest rate rise in the UK, while the money markets continue to dry up and house prices look to have peaked.
A survey from the Royal Insititute of Chartered Surveyors earlier in the week showed house prices fell in August for the first time in two years.
Northern Rock was the biggest mortgage lender in the UK in the first half of the year.
So its problems accessing funds in the normal way through borrowing from banks and other financial institutions has deepened fears that the British economy will suffer as a result of the credit clampdown.
This has prompted many traders to predict that the Bank of England could even start cutting rates from their current level of 5.75% from next year to support growth and renew confidence in the financial system.
A rate cut would see sterling fall further against major currencies, such as the euro and dollar as the currency would become less attractive for income seekers.
"The longer credit market turmoil persists, the more the market will view currencies with housing market excesses with suspicion," said ABN Amro analysts.
"The UK and the pound may be seen as the next cab off the rank."