Falls were mirrored across Europe and on Wall Street after minutes of the Federal Reserve's January meeting showed that a number of members were concerned about the cost and risks of carrying out further asset purchases under its quantitative easing programme.
With investors shocked, the FTSE closed 1.6% lower, or 103.8 points, at 6291.5, having set a five-year high on Wednesday on hopes the Bank of England will sanction more QE.
Sir Mervyn King's vote in favour of more asset purchases at the Bank's meeting earlier this month meant a big sell-off for the pound yesterday.
But there was a recovery after public sector borrowing figures showed a better-than-expected tax take in January. While economists worried the bumper month would not be enough to prevent the UK from losing its AAA credit rating, sterling took heart from the figures – rising to $1.53 and €1.16.
Miners bore the brunt of the equities sell-off, with Evraz down 14p to 266.7p and Vedanta Resources 51p lower at 1206p.
Defence giant BAE Systems was one of a handful of stocks on the blue-chip risers board after it announced the start of a three-year share buy-back programme alongside the publication of its full-year results.
Profits were 7% lower for 2012, but with more orders flowing in from countries other than the budget-constrained UK and US the company expects an improvement in earnings per shares this year. Shares were 4% higher, up 13.7p at 345.9p.
RSA Insurance rose a penny to 118p as it steadied after its 14% slump yesterday in reaction to a surprise dividend cut and criticism from top shareholders.
Outside the top flight, retailer Sports Direct International jumped 6% or 24p to 440p after it said it was "certain" to meet its earnings target for the year to April of £270 million.
This followed another strong quarter of trading, with sales from its 400-strong retail estate up 21% to £495.8 million.
There was no such boost at home improvement firm Kingfisher, with poor weather and weak economic conditions causing sales at B&Q to fall 6.4% in the UK and Ireland.
Chief executive Ian Cheshire admitted the final quarter of the year to February 2 reflected a tough year as a whole, but that it was still in good shape with a bigger market share and a strong balance sheet. Shares were 0.1p lower at 278.2p.