The pound soared nearly 3% while £27 billion was wiped off the FTSE 100, after 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 from the FTSE 100, to closer lower by 1.46% at 7,220.38 points, its 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 barrel (£45.13), with international investors taking advantage of cheaper dollar-denominated commodities such as oil as the greenback weakened against a basket of currencies.
In UK stocks, Rolls-Royce Holdings rose 29.5p at 694.5p, as the company agreed to pay £671 million to British, US and Brazilian authorities to settle bribery and corruption claims.
British American Tobacco (BAT) shares fell 182.5p to 4,580p after the Dunhill and Lucky Strike maker agreed to pay 49.4 billion US dollars (£40.8 billion) to take full control of US rival Reynolds in a deal creating the world's largest listed tobacco company.
The mega-merger comes after months of talks between the pair and sees BAT, which already owns 42.2% of Reynolds, unveil a higher offer of 59.64 US dollars (£49.27) a share for the remaining 57.8% of the company.
Shares in Hotel Chocolat fell 3p to 292p despite it notching up an impressive 16.2% rise in second quarter sales as it benefited from a strong Christmas.
Mears Group rose 4.25p to 460.25p after the care and support services provider Mears Group said it will deliver "solid" trading figures for 2016 and confirmed the overhaul announced in August is "substantially complete".
The biggest risers on the FTSE 100 were Rolls-Royce Holdings up 29.5p at 694.5p, Hargreaves Lansdown up 50p at 1,329p, EasyJet up 35p to 1,058p, and Standard Chartered up 20.4p to 744.7p.
The biggest fallers on the FTSE 100 were British American Tobacco down 182.5p to 4,580p, Carnival down 149p to 4,113p, Intertek Group down 114p to 3,449p, and Wolseley down 159p to 4,866p.