Sterling surged to three-week highs on news that the Government could be willing to pay for access to the EU's single market after Brexit in order to maintain open access for businesses.
The pound rose 0.7 per cent against the US dollar to 1.259, after briefly rising to 1.269 earlier in the day.
Against the euro, sterling rose 0.3 per cent to a one-month high of 1.184, aided by the eurozone currency's struggles in the face of the Italian referendum on Sunday.
The FTSE 100 closed lower by 0.45 per cent or 30.86 points at 6,752.93, with few stocks managing to finish the day in positive territory.
The UK's currency rose after Brexit Secretary David Davis told MPs that ministers want to "get the best possible access for goods and services to the European market" after the UK has left the bloc and suggested the Government is open to the possibility of making contributions to the EU to secure that access.
Meanwhile, the UK market shrugged off news of lower-than-expected factory activity after the Markit/CIPS manufacturing purchasing manager's index (PMI) for November came in below expectations for 54.5 at 53.4.
Across Europe, the French Cac 40 and German Dax closed lower down 0.39 per cent and one per cent, respectively.
Brent crude prices continued to climb, rising 5.6 per cent to around $54.37 (£43.18) a barrel after Opec announced on Wednesday that it had reached a deal to cut production from January 1 2017.
The move - which marks the first output cut since 2008 - is expected to push up prices, which have tumbled more than 50 per cent since their June 2014 peak amid a growing supply glut.
It helped push oil giants BP and Royal Dutch Shell near the top of the FTSE 100, rising 10.6p to 470.05p and 59.5p to 2,178p, respectively.
Centrica shares fell 1p to 209.3p after British Gas announced a price freeze for more than six million customers on standard tariffs that will run until at least March 2017.
Serco shares fell 0.5p to 132.5p after saying it was on track to meet full-year financial targets with £3 billion in revenue and £150 million in underlying profit, avoiding the tough trading conditions created by economic uncertainty and higher staffing costs.
Shares in Daily Mail and General Trust - the publisher behind the Daily Mail, Mail on Sunday and freesheet Metro - have jumped 22.5p to 785.5p after posing a 14 per cent rise in full-year pre-tax profits to £247 million.
However, the company warned that the vote to quit the EU represents a risk to the business, if slowing economic growth results in a drop in advertising revenues.
Shares in McColl's rose 1p to 176p after the retail chain notched up its sixth straight year of rising sales and hit its target for 1,000 convenience stores across the UK.
The group posted a 1.9 per cent rise in sales over the year to November 27.
The biggest risers on the FTSE 100 were Dixons Carphone up 12.6p to 344.4p, Royal Dutch Shell's 'B' shares up 59.5p to 2,178p, Royal Bank of Scotland up 5.4p to 199.7p, and Legal & General Group up 6.5p to 242.3p.
The biggest fallers on the FTSE 100 were Coca Cola HBC down 67p to 1,633p, DCC down 210p at 5,920p, Severn Trent down 74p to 2,113p, and Land Securities down 31p to 939p.
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