Sterling climbed out of the red after a higher than expected number of Bank of England Monetary Policy Committee (MPC) members voted to raise interest rates on Thursday.
The pound surged 0.7% against the euro to 1.444, its highest level since the General Election. Versus the US dollar, sterling was up 0.05% at around 1.275.
The currency's strength weighed on the FTSE 100, which fell 0.7% or 55.04 points to end the day at 7,419.36.
The Bank's vote was a boon for the pound, which tumbled in morning trading after data from the Office for National Statistics showed retail sales fell by 1.2% between April and May.
Fortunes turned after the MPC voted five to three to leave interest rates at 0.25%.
David Madden, a market analyst at CMC Markets UK, said: "The fall in UK retail sales in May only added to sterling's woes, but the shock that three members of the Bank of England (BoE) voted to increase interest rates jolted the pound higher.
"Kristin Forbes was known to be in favour of hiking rates, but it surprised traders that Michael Saunders and Ian McCafferty joined her today.
"As it stands, five members voted to keep rates on hold, but today's vote shows the gap is narrowing."
Across Europe, the French Cac 40 and German Dax were down 0.5% and nearly 0.9%, respectively.
In oil markets, Brent crude prices were nearly flat at 46.86 US dollars per barrel (£36.72), despite reports that Saudi Arabia would start cutting supplies to Asian and US buyers in the coming months as Opec members try to manage the global glut.
In UK stocks, British Airways owner IAG saw shares dropped 20.5p to 584p as the company revealed that the major IT failure that caused travel chaos for tens of thousands of passengers last month will cost the company £80 million.
Amec Foster Wheeler shares slumped 13.6p to 483p and Wood Group shares dropped 21.5p to 663.5p as both companies' shareholders approved Wood Group's £2.2 billion takeover of the engineering and project management firm.
Majestic Wine shares tumbled 35.5p to 349.25p despite insisting that it is "past the tipping point" with its recovery plan, as investors focused on its annual pre-tax loss of £1.5 million.
Shares in DFS Furniture plunged 52p to 200p as the sofa chain warned over profits, saying that an "uncertain macroeconomic environment" led to weak trading at its stores.
DFS is forecasting full-year operating profit to be lower than market expectations and in the range of £82 million to £87 million.
The biggest risers on the FTSE 100 were Ashtead up 23p at 1,600p, HSBC Holdings up 6p at 686.7p, Royal Bank of Scotland Group up 1.6p to 251.5p, and London Stock Exchange Group up 23p to 3,655p.
The biggest fallers on the FTSE 100 were Fresnillo down 122p at 1,558p, Persimmon down 163p to 2,259p, Next down 264p at 4,037p, and Anglo American down 63.9p at 995.1p.