Sterling sank 1.2% to $1.11 as news of the sacking of Kwarteng was confirmed. The slide pushed back from near one-week high of 1.135 in early trade.
It has since pared losses as currency markets digest the replacement of Kwarteng, Jeremy Hunt, who has been appointed chancellor.
The outgoing chancellor confirmed he was asked to "step aside" in an official letter posted on his Twitter.
Kwarteng, a close ally of prime minister Liz Truss, in his outgoing letter to the PM, said he had accepted her decision to sack him. "You have asked me to stand aside as our chancellor. I have accepted," he wrote on Friday, stressing that Truss’s vision was "the right one".
His tenure makes him the UK's second shortest-serving chancellor on record after just 38 days in the job, behind Iain Macleod, who died of a heart attack 30 days after taking the role in 1970.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: "Kwasi Kwarteng’s fate shows just how serious the UK’s loss of credibility with the markets was, as he becomes one of the shortest serving chancellors in history.
"The market will have been craving a safe pair of hands to guide the UK through this difficult period, so it will be interesting to see how gilt yields and the pound respond to Jeremy Hunt being given the difficult task of running the public purse. How long he gets to do this for will ultimately be the next question."
Kwarteng had left the International Monetary Fund summit in Washington DC, early to address the UK's economic crisis, but reports soon emerged after his arrival at Heathrow that he was set to be ousted.
In an address to the nation on Friday afternoon, Liz Truss vowed to see through her low-tax agenda as she announced a major U-turn, reversing on a cut in corporation tax - a key pledge in her economic plan.
The PM said her mission remains the pursuit of a “low-tax, high-wage, high-growth economy” but accepted parts of the mini-budget last month went “further and faster” than markets had expected.
Admitting she had to change course, she reversed a key policy to scrap the planned rise in corporation tax from 19% to 25%.
The government's disastrous fiscal plan had caused market turmoil, a bailout of pension funds by the Bank of England, and rising mortgage rates.
Analysts earlier said that markets appear to be finally responding well to reports that the government is about to get serious in heeding warnings over its unfunded tax cut plans.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said: "Chancellor Kwasi Kwarteng won’t be blind to the effect flying home from his Washington DC trip early will have – there is allegedly no precedent for a chancellor returning early from the IMF event for personal reasons.
"There is a sense of urgency in this move and it would seem the market is optimistic that Kwarteng’s romcom-worthy dash through the airport suggests a dramatic reconciliation between stubborn existing policy and the U-turn investors have been waiting for."
The £43bn in unfunded tax cuts has sent markets into meltdown and sparked an unprecedented sell-off in gilts.
The £65bn scheme was aimed at propping up the gilts markets in a bid to stave off a collapse in pension funds. Pension funds rely on these assets as a sort of hedge against their liabilities.
As a result of the sell-off liability-matching pension funds were required to put up cash against the falling value of their positions, to make what is known as a margin call, Ashmore notes.
Dan Ashmore, analyst at Invezz said: "While the sell-off is extremely concerning for the economy at large — with the pound collapsing, mortgage rates on the up, investor sentiment through the floor, government borrowing costs skyrocketing, and a host of other problems — pension holders should not be overly concerned.
"The Bank has made it clear that it will not allow financial stability to ripple like a contagion, while pensions will be — and are — getting defended vociferously. This mainly amounts to a liquidity crisis, and once these issues are overcome, the bonds held by pensions should pay a higher rate of interest over the long-term."
It remains to be seen whether Threadneedle Street's emergency measure has been enough to soothe market jitters.