Sterling surged to a fresh one-year high against the US dollar while blue-chip stocks slumped after the Bank of England hinted that it may hike interest rates in the "coming months".
The pound was up 1.4% versus the greenback at 1.33, and 1.5% higher against the euro at 1.12, following the Bank's signal that it may move to curb soaring inflation.
However, the stronger pound took its toll on the FTSE 100 Index, which closed down 84.31 points to 7,295.39.
Multinational blue-chip stocks suffer when the pound rises because their overseas earnings are hit by a less favourable currency translation.
Members of the Bank's nine-strong Monetary Policy Committee voted 7-2 to keep interest rates on hold at 0.25%, as widely expected.
But minutes of the latest rates decision showed all policymakers believed "some withdrawal of monetary stimulus was likely to be appropriate over the coming months".
The Bank also reiterated that rates may need to rise by more than expected in financial markets.
David Madden, market analyst at CMC Markets, said London's top flight was also under pressure from a commodity stocks drop in response to lacklustre economic data from China.
He said: "European equity markets got off on the wrong foot this morning as economic indicators from China pointed to a slower rate of growth.
"The retail sales, industrial production and fixed asset investment figures all came in below economists' expectations and grew at a slower pace than the previous reading.
"The Chinese figures set the tone for the day, and the spike in sterling on the back of the Bank of England update weighed heavily on the FTSE 100.
"The British index is paying the price for a strong domestic currency."
Across Europe, Germany's Dax is down 0.1% and the Cac 40 in France was 0.2% higher.
The price of oil climbed 1% as the International Energy Agency forecast demand to increase - a move which would help curb the global supply glut.
Brent crude was up 57 cents to 55.73 a barrel.
In UK stocks, high street retailer Next was in the ascendancy after the group upped its earnings outlook after "encouraging" trading.
Chief executive Lord Wolfson told the Press Association the impact of the Brexit vote on the pound "doesn't look like it's fuelling an inflationary spiral and is passing right through".
The fashion group hiked its sales and profit guidance as it said trading had turned a corner after a difficult start to its half year, although pre-tax profits still fell 9.5% to £309.4 million for the six months to the end of July.
Shares soared 13%, up 577p to 4,994p.
