The pound has hit its highest level against the US dollar since October but the FTSE 100's market value plunged by £46bn after Theresa May revealed plans for an early election.
Earlier this morning, sterling had fallen dramatically to around $1.2515 amid speculation about what the Prime Minister was going to announce.
But it climbed after Mrs May confirmed her wish for a 8 June General Election date - passing $1.27 by mid-afternoon, its highest level since the beginning of December. It later nudged $1.29 - not seen since October.
It still remains well below pre-referendum levels.
Against the euro, the pound was hovering around €1.1960, rising 1.3% from a 0.4% loss early in the session.
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Alexandra Russell-Oliver, Caxton FX's currency market analyst, said: "If the elections grant the Conservative Party greater support, this could put the UK in a stronger position to negotiate Brexit, which could strengthen the pound."
Kathleen Brooks, research director at City Index Direct, said the morning's events may also show that the market's view of Brexit has changed.
She (Munich: SOQ.MU - news) said: "If the market is taking the view that it is better the devil you know and with the odds massively in Theresa May's favour that she will win this election, we could see the pound catch a bid as we lead up to 8 June, and our 1.30 forecast for GBP/USD doesn't seem that outlandish."
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Others urged caution, suggesting speculative investors had taken sterling to unrealistic levels.
The strengthening had a predictable effect on the FTSE 100.
The market, often volatile on news that brings any uncertainty, endured its biggest one-day fall since 27 June - just after the EU referendum.
Having already been down before Mrs May's speech, it closed 180 points, or 2.5% lower, wiping £46bn off the value of its constituent companies.
The FTSE tends to fall when the pound climbs, as stronger sterling weakens the value of multinationals' revenue from overseas. Weaker oil prices, on the back of strong US output figures, also knocked energy stocks.
Neil Wilson, senior market analyst at ETX Capital, said: "For investors (the election) adds another layer of complexity to an already uncertain picture for UK and European assets.
"Volatility is likely to remain elevated over the coming weeks. And as elections are so unpredictable, there is always the outside risk it could spark a reversal in the entire Brexit process.
"However, on the current polling, the likelihood is we will be left with a Government on a more secure footing that will ensure Brexit means Brexit."