The pound has fallen to its lowest level since April against the euro after a warning that UK public debt levels may not be sustainable.
The Bank of England cautioned that foreign investors may not be as willing to purchase UK assets, thus hurting the pound's long-term exchange rate.
The pound fell as low as 1.1016 euros, and fell to $1.6134 against the dollar, its weakest in almost three weeks.
However, sterling is still stronger than it was at the start of the year.
The fall in the value of the pound against the euro has sparked renewed talk of parity between the two currencies.
"We were here last October and we headed down to parity against the euro by Christmas. I think we are going the same way again," Mark O'Sullivan from Currencies Direct told the BBC.
In its quarterly bulletin, the Bank of England noted that the UK had run current account deficits for more than a decade - sustainable as long as the deficit was offset by foreign investors' purchases of UK financial assets.
"But the financial crisis may have led overseas investors to reassess their willingness or ability to purchase sterling assets and thereby finance the UK trade deficit," the Bank of England said.
"As a result, the long-run sustainable real sterling exchange rate... may have fallen."
On Friday, official figures showed UK's public sector net borrowing totalled £16.1bn last month.
This was the highest figure on record for August.
The government's overall debt now stands at £804.8bn, or 57.5% of GDP, an increase of £172bn in the past year.
The massively increased levels of debt are due to the government bailing out troubled banks and its efforts to stimulate the economy during the recession.
It has also had to contend with severely reduced tax receipts from house sales and City bonuses, for example.