Sterling “fell off a cliff” after the shock exit poll indicating the Tories may fall short of an overall majority.
The pound fell over 1.5% to 1.27 US dollars following the poll, which shows the Conservatives are set to be the largest party but 12 short of the 326 required for a parliamentary majority.
A short while later it recovered slightly and is now above 1.28 US dollars but down 1.2%.
Against the euro, the pound plummeted over 1% to 1.13 euros.
Craig Erlam, Senior Market Analyst at OANDA, said: “The initial exit poll suggest it’s been a catastrophic campaign for Theresa May.”
He added: “Sterling has fallen off a cliff after the initial exit poll.
“A hung parliament is the worst outcome from a markets perspective as it creates another layer of uncertainty ahead of the Brexit negotiations and chips away at what is already a short timeline to secure a deal for Britain.”
If the poll is proved correct, a resurgent Labour will end up with 266 seats, the Liberal Democrats with 14 and the SNP on 34.
Markets had priced in a Conservative victory with a healthy majority, giving Theresa May free rein to take charge of Brexit negotiations unhindered.
However, Mrs May’s gamble appears to have backfired, with a late surge for Jeremy Corbyn seemingly ending expectations of a Tory landslide.
Neil Wilson, senior market analyst at ETX Capital, said: “Has May’s great gamble failed? If accurate a hung parliament leaves Theresa May’s position as leader in serious doubt and makes the process of Brexit incredibly uncertain.
“It’s fair to say the City was pretty confident of a Conservative majority.
“A hung parliament throws open all kind of doubts, uncertainty and indecision over the looming challenge of Brexit. We have the possibility of a coalition government and all that entails.”
James Knightley, senior economist at ING, said: “Given Labour’s left wing tax and spend manifesto and desire to nationalise the utility, rail and mail industries, markets are not going to react well if this is the outcome.
“The fear of higher deficits and national debt is leading to a spike in government bond yields.
“Meanwhile the greater chance of a Scottish Independence referendum in the next couple of years (Labour may have to offer this to get the support of the SNP) will intensify political uncertainty and it is already weighing heavily on the pound.”
But observers also believe that a hung parliament makes the prospect of a so called hard Brexit less likely, which would be welcomed by markets and the world of business.