The pound was weaker against the dollar in morning deals and the cost of government borrowing climbed after shock news last night that Gordon Brown is to step down as leader of the Labour Party in a last ditch attempt to secure a deal with the Liberal Democrats to form the next government.
The pound was 0.22% lower against the dollar at $1.4830.
Michael Hewson, analyst at CMC Markets, said: 'The resignation of Gordon Brown to help oil the wheels of a new Lib/Lab pact saw sterling undermined. This new element throws into doubt hopes of a quick deal in order to deal with the problem of the UK deficit and adds to the uncertainty surrounding the type of government the UK might get.'
But the pound was a touch higher against the euro at €1.1639 as markets are increasingly nervous that even the €750 billion pound package to keep money flowing to Greece, Spain, Portugal and Italy isn't enough to put debt worries to bed.
The news that credit ratings agency Moody's is considering downgrading Portugal and Greece saw the cost of insuring government debt rise across Europe.
The yield on UK government bonds spiked above 4% last night and again this morning but edged lower again to 3.984% as market nervousness focussed on Southern Europe again.
Deutsche Bank strategists said overnight that the UK and US are the most vulnerable nations based on their current budget deficits.
A trader at a leading European brokerage said: 'While debt levels are as high as they are, the UK and US also need market confidence and capital markets to be continually open for them 24/7.'
