The pound plunged to a 14-month low against the dollar on Monday as fears escalated over the UK government's financial position.
Sterling fell after George Osbourne, the UK's new chancellor, told the Financial Times that the former Labour government had "fiddled" forecasts in order to allow it to present the sort of spending plans that "it wanted to present".
Concerns over the UK's record fiscal deficit also heightened on reports that the new UK government had accused the previous Labour administration of pursuing a "scorched earth policy" before the general election, leaving behind billions of pounds of previously hidden spending commitments.
The reports raised fears that the UK could experience heightened difficulties in raising funds in the market in the future.
"Sterling is expected to be increasingly exposed to the sovereign debt crisis as international bond portfolio managers turn their back, not only on European bonds, but on UK assets as well," said Hans Redeker at BNP Paribas.
Sterling dropped to a low of USD 1.4249 against the dollar, its weakest level since March 2009, before regaining some poise to stand down 0.8% at USD 1.4417.
The pound also dropped 1.2% to Y132.80 against the yen.
But sterling's losses were less acute against the euro - it eased 0.2% to £0.8522 - as the single currency continued to come under pressure after a sharp sell-off last week.
The euro tumbled to a four-year low against the dollar amid continued concerns that the fiscal consolidation required to shore up eurozone government finances would hurt any recovery in the region.
The euro has dropped more than 7% against the dollar this month as the fallout from the Greek debt crisis has sparked fears over the ability of other countries in the eurozone to finance their debts and raised concerns over the very existence of the single currency.
"What we are experiencing is almost like a run on the euro," said Ulrich Leuctmann at Commerzbank.
The negative sentiment towards the euro was highlighted by data showing speculators had raised their bets against the euro to fresh record levels.
Positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, showed speculators raised their bets against the euro from 103,400 contracts to 113,900 contracts, or USD 18bn, in the week to May 7.
Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ said it was not just short-term speculators that were abandoning the euro, however.
He said what was worrying market participants most was the fact that there was nothing now left for European authorities to do to shore up confidence after the ?750bn international rescue package announced for the eurozone last week.
"With nothing set to change the grim sentiment on the euro, there is a growing risk that long-term players like central banks begin to ditch the single currency," said Mr Halpenny.
The euro fell to a low of USD 1.2234 against the dollar, its weakest level since late April 2006, before recovering to stand down 0.6% at USD 1.2286.
The euro also dropped 1 per cent to Y113.23 against the yen and hit a fresh record low of SFr1.3998 against the Swiss franc.
Meanwhile, the dollar and the yen received a lift as worries over sovereign debt spilled over into global equity markets, sending stocks lower and boosting haven demand for both currencies.
The dollar rose 0.6% to SFr1.1397 against the Swiss franc and climbed 1.1% to USD 0.8759 against the Australian dollar.
The yen outperformed the dollar, rising 0.3% top Y92.15.
