STERLING received a shot in the arm on Thursday from the Bank of England, which fuelled market expectations for a summer hike in interest rates.
The central bank held interest rates at 0.5%, but edged closer to a hike after its chief economist joined two fellow policymakers in calling for a rise.
Members of the Bank's Monetary Policy Committee (MPC) voted 6-3 to keep rates unchanged, with Andy Haldane switching sides to join fellow dissenters Ian McCafferty and Michael Saunders in pushing for an immediate increase to 0.75%.
The news sent the pound rocketing against the dollar and euro, rising 0.6% to 1.325 and 0.3% to 1.141 respectively.
Currency traders interpreted the voting pattern as meaning an increase could be on the cards as soon as August.
But Fiona Cincotta, senior market analyst at City Index, cautioned that any hike is dependent on economic data in the coming months.
"Whilst the BoE are clearly keen to hike, they haven't offered any firm signal or commitment that they will do so, instead leaving it once again in the hands of the data.
"The tone of the meeting shows the BoE are wanting to hike should the data allow it. We therefore expect to see more volatility than usual surrounding high impacting data releases across the start of the summer.
"July, which can often be a quiet month on the markets, promises a bit more action this year."
The pound's rise came at the expense of the FTSE 100, which gave up gains earlier in the session to end the day in the red.
The index closed down 70.96 points, or 0.93%, at 7,556.44.
In stocks, shares in Dixons Carphone rose 4.5p to 195.25p.
This was despite the retailer posting a slump in annual profits, a week after coming clean about a major cyber attack.
The group announced underlying pre-tax profits had fallen by 24% to £382 million for the year to April 28, and warned that cost pressures would hit profits once again in the year ahead.
Shares in defence firm Chemring were also in the ascendancy after the group said geopolitical tensions following events such as the Salisbury poisoning and Syrian attacks have revived the market.
The defence equipment firm logged bottom line profits of £4.3m in the six months to April 30, having reported a loss of £6.8m during the same period last year. Shares ended the day up 7p at 224p.
In Europe, Germany's DAX closed down 1.44% while France's CAC 40 index ended down 1%.
Brent crude was trading down over 1% at $73 a barrel ahead of a critical Opec meeting on Friday.
The biggest risers on the FTSE 100 were Ocado up 38.5p at 1,040p, Shire up 78p at 4,088p, Sky up 25p at 1.405p and British American Tobacco up 60p at 3,839p.
The biggest fallers on the FTSE 100 were United Utilities down 48.6p at 739.2p, Barratt Developments down 20.2p at 517.8p, Melrose Industries down 8.7p at 223p and Persimmon down 80p at 2,530p.
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