Sterling plunged by as much as 6% against the dollar overnight in a "flash crash" during the Asian trading session.
The pound fell to 1.18 dollars in a matter of minutes, hitting fresh 31-year lows before recovering to 1.24.
Market-watchers pointed to comments by French President Francois Hollande, who insisted the European Union must take a tough stance in negotiating Brexit, and a "rogue algorithm".
Read more: One in three Labour voters 'backs coalition with SNP'
Kathleen Brooks, research director at spreadbetter City Index, said: "Apparently it was a rogue algorithm that triggered the sell-off after it picked up comments made by the French President, Francois Hollande, who said if Theresa May and co want hard Brexit, they will get hard Brexit.
"These days some algos trade on the back of news sites, and even what is trending on social media sites such as Twitter, so a deluge of negative Brexit headlines could have led to an algo taking that as a major sell signal for GBP.
"Once the pound started moving lower, then more technical algos could have followed suit, compounding the short, sharp, selling pressure."
Read more: One in three Labour voters 'backs coalition with SNP'
Traders have been increasingly alarmed since the Conservative Party conference began last weekend, with the Prime Minister giving her clearest indication yet that Britain is hurtling towards a so-called "hard Brexit".
It would involve pulling Britain out of the European single market so the Government can tighten its grip on immigration.
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