Sterling dropped to a record low against the euro and its weakest level in six months against the dollar as bad news from the UK retail sector heightened fears over the health of the country's economy ahead of the Bank of England's decision on interest rates.
Marks & Spencer (M&S), the UK's largest clothing retailer, revealed a 2.2 per cent fall in like- for-like sales in the last quarter.
Analysts said the news stoked fears that recent turmoil on financial markets was spilling over into the real economy, lifting expectations that the Bank of England would cut interest rates by 25 basis points to 5.25 per cent after its policy meeting today
Paul Mackel at HSBC said sentiment towards the pound was already fragile ahead of the announcement from M&S after it failed to rally significantly following unexpectedly strong house price data on Tuesday.
"The news from M&S adds to the flavour that sentiment towards the UK economy is eroding from a consumer standpoint and has undermined sterling," he said.
"People are quite happy going short of the pound ahead of Thursday's [ today's] interest rate decision."
The pound fell 0.5 per cent to £0.7499 against the euro, its weakest level since the single currency's introduction in 1999, and dropped 0.4 per cent to $1.9635 against the dollar.
Sir Stuart Rose, chief executive of Marks & Spencer, who called on the Bank of England to reduce interest rates, said: "There is a very evident slowdown in UK plc and people are financially challenged.
"Market conditions became more challenging through November and December."
He added: "We expect trading conditions to remain tough throughout 2008."
However, he maintained there would be no change in the group's strategy. "We are not changing strategy. We are going to sit down and look at costs. But we are still looking at refurbishing and still looking at international expansion."
M&S enduring its biggest share price slide in 19 years of market trading, falling 86p at 417½p - having briefly dipped below 400p, the price Sir Philip Green indicated he would pay for the company in 2004.
The fall in sales, which came after nine consecutive quarters of growth, was sharper in general merchandise, where comparable sales fell by 3.2 per cent.
In food, like-for-like sales were down by 1.5 per cent.
Retail stocks across Europe were weaker on the back of the Marks & Spencer news, leading markets down.
The Irish stock market fell 3 per cent yesterday, wiping €2.6 billion off the value of companies, in what one dealer described as "a real downbeat day" for the Dublin market.
After a 26 per cent plunge in the value of the Iseq index in 2007, it has not been the best start to the year for the Dublin market, with the market shedding a further 3.6 per cent.
Some €3 billion has been knocked off the value of Irish stocks in 2008 amid fears about the knock-on effects of a possible US recession and a downturn in the UK economy.
(Additional reports by Financial Times)
