Sterling surged after Britain and the EU finally reached agreement on a transition deal that will allow talks on the future trade relationship to begin later this week.
The pound jumped over a cent to 1.404 US dollars and climbed 0.4% against the euro to €1.138 as traders interpreted the agreement - which will see the UK will abide by EU laws for the 21-month post Brexit period - as a positive for the British economy.
Fiona Cincotta, senior market analyst at City Index, said the deal "removes a layer of uncertainty for UK businesses".
However she cautioned: "The transition deal, whilst perhaps the most positive piece of news for the pound since the Brexit referendum, is not an all winning solution.
"The transition deal itself remains dependent on a Brexit deal being reached and although this is clearly a step in the right direction, it is by no means a guarantee."
The FTSE 100, meanwhile, had a bruising day, ending down 1.69%, or 121.21 points, at 7,042.93, as software group MicroFocus dragged the index lower after its shares went into freefall.
The company's stock crashed 46% to 1,011p after seeing its chief executive quit and warning over sales.
MicroFocus said annual revenues were falling at a faster rate than previously expected after being confronted by lower licensing income, adding that boss Chris Hsu was quitting to "pursue another opportunity", just six months after taking the role.
Miners Glencore, Anglo American, Rio Tinto and BHP Billiton also ended the day in the red as weak metal prices weighed on the top flight.
David Madden, market analyst at CMC Markets, also pinned the FTSE's fall on the pound's strength.
"The FTSE 100 is the largest faller of the European markets today due to the rally in the pound.
"Sterling surged on the back of the announcement that the UK and EU have agreed to a Brexit transition period. The inverse relationship between the pound and the FTSE 100 has set in, and the British equity index is paying the price for its international exposure."
At the other end of the spectrum, Barclays shares rose to the top of the pile after activist investor Sherborne become the fourth-largest investor in the lender, raising the prospect of pressure being put on the bank's board.
Sherborne, run by Edward Bramson, picked up a 5.16% stake in Barclays for £580 million and now sits behind Capital Group, Qatar Investment Authority and BlackRock on shareholder register.
Mr Bramson's company bills itself as a "turnaround investment firm" and has a stated goal of doubling the share price of companies it invests in.
The FTSE 250 ended down 0.56%, or 110.13 points, at 19,694.77.
Hammerson shares rose 24% to 542.4p after the shopping centre owner branded a takeover approach from European rival Klepierre "wholly inadequate" and stood by plans to seal a £3.4 billion tie-up with Intu.
Across Europe, the French Cac 40 closed down 1.1% while the German Dax ended the day down 1.4%.
Brent crude was up at 66.04 US dollars a barrel compared to 65.55 US dollars.
The biggest risers on the FTSE 100 were Barclays up 7.5p to 217p, British Land up 16p to 648p, Berkeley Group up 58p to 3,771p, Carnival up 37p to 4,735p and EasyJet up 11.5p to 1,670p.
The biggest fallers on the FTSE 100 were Micro Focus down 873.5p to 1,011p, Glencore down 16.25p to 369.25p, Anglo American down 74.4p to 1,695p, BHP Billiton down 54.6p to 1,388.6p and British American Tobacco down 153.5p to 4,030p.
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