Currency investors are switching back to the US dollar
The pound has tumbled almost 3% against the US dollar - falling to its lowest level in five years on recession fears.
Sterling's fall came after the Bank of England governor, Mervyn King, warned that Britain was probably entering its first recession in 16 years.
The pound dropped as low as $1.620 overnight, its lowest since September 2003. It later recovered to $1.6398.
The euro fell as low as $1.2736 against the dollar before rising to $1.2895 later in the day.
POUND STERLING v UNITED STATES DOLLAR: 22 October 2008
*All Times GMT
The dollar has also been rising against other currencies. It has jumped to a two-year high against a basket of currencies as investors have bet that interest rates outside the US will be cut sharply to try to bolster global growth.
In the UK both Prime Minister Gordon Brown and Bank of England governor, Mervyn King, have warned of the danger of recession, boosting expectations of lower interest rates.
Referring to the pound and the dollar, Simon Derrick, head of currency research at the Bank of New York Mellon, said: "I think it is a combination of both strength in the dollar and weakness in sterling.
"I certainly believe this was a very direct reaction to Mr King's comments overnight.
"The recession talk is clearly undermining investors in the equity markets and therefore people are bringing their money home."
Meanwhile, concerns there may be a deep slowdown in the world economy have prompted investors to cash in more of their bets against the US dollar which had built up in recent years.
"Investors continue to flock to the dollar as speculation mounts that central banks elsewhere will continue with aggressive rate cuts in an attempt to stimulate growth in the near term," said James Hughes, an analyst at CMC Markets in London.
"The pound has to be the stand-out, with losses here being compounded by unprecedented comments from Mervyn King last night, essentially confirming the fact that the British economy is now in a recession and any recovery will be far from swift," he added.
POUND STERLING v EURO: 22 October 2008
*All Times GMT
At one point this year, the euro reached a record high above $1.60.
Currency traders said a wide range of players from hedge funds to Japanese institutional investors were now rushing to cancel their positions and cut their losses.
The dollar fell to 99.29 yen in Asia on Wednesday, down from 100.23 yen late on Tuesday.