THE pound was reeling from a "flash crash" that sent the UK currency plunging more than six per cent to fresh 31-year lows in early trade, prompting fears that Brexit could knock sterling even lower.
The value of sterling plummeted to $1.18 during the Asian trading session, before recovering to $1.2414 at 5pm in London. The pound was also at five-year low against the euro, down 1.8 per cent at 1.113.
The further drop in sterling supported the FTSE 100, which held above the 7,000-mark, to close higher by 0.6 per cent or 44.4 points at 7044.4 points.
A weaker pound tends to benefit listed multinationals that earn in foreign currencies like the US dollar.
It helped mining companies rise to the top of the blue chip index, with Glencore up 9.15p to 223.6p, and Fresnillo up 51p to 1665p.
Despite sterling's recovery from the Friday morning flash crash, the pound is down around four per cent against the dollar since last Friday, September 30.
The Bank of England says it has asked the Bank for International Settlements' market committee to "look into the events surrounding the flash crash".
Market-watchers say the drop was triggered by algorithmic trading, with programmed computers reacting to comments from French president Francois Hollande, which suggested the EU should take a tough stance in Brexit negotiations.
Connor Campbell, a financial analyst at SpreadEx said that Brexit jitters have returned to the market.
"It seemed that the threat of Brexit had lost some of its potency - not anymore. Following the 'hard' Brexit-suggesting Tory conference, and similarly threatening comments from Angela Merkel and Francois Hollande, the pound has become positively sick with fear," Mr Campbell said.
The drop in sterling prompted beleaguered retailer Sports Direct to issue a profit warning, saying that "extreme movements" in the pound would result in lower full-year profits of £285 million, compared to previous forecasts for £300m.
Sports Direct shares plunged nine per cent or 27.4p to 273p.
Across Europe, both the French Cac 40 and German Dax closed lower, dropping 0.67 per cent and 0.74 per cent respectively.
In oil markets, Brent crude prices fell 2.1 per cent to $51.45 per barrel as optimism over a tentative deal between Opec members to cut production waned, and concerns regarding the supply glut weighed on investment.
On the UK's blue chip index, Lloyds Banking Group shares dropped 4.5 per cent or 2.49p to 52.5p following news government was preparing to sell off its remaining 9.1 per cent stake in the bank to institutional investors.
The biggest risers on the FTSE 100 were Glencore up 9.15p to 223.6p, Fresnillo up 51p to 1665p, Standard Chartered up 18.8p at 673.9p, and HSBC Holdings up 16.9p to 619.5p.
The biggest fallers on the FTSE 100 were Dixons Carphone down 21.7p at 341.1p, Sainsbury down 12.9p to 232p, Barratt Developments down 25.3p at 479.7p, and ITV down 8.9p at 175.1p.
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