Sterling initially pushed 1% higher against the dollar to over $1.08, before sharply falling 1.5% to $1.05.
The currency has been in volatile trading since the start of the week as it attempts to recover from an all-time low of $1.03 against the greenback.
Threadneedle Street announced a temporary bond-buying scheme from 28 September to 14 October to stave off what it labelled a "material risk to UK financial stability".
The world's lender has urged prime minister Liz Truss to reverse the decision to abolish the top rate of income tax, in a very rare attack on the economic policy of a G7 country.
The IMF also urged chancellor Kwasi Kwarteng to use his fiscal plan in November to change course.
"Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy," an IMF spokesperson said.
The IMF's shock intervention came as ratings agency Moody’s raised the possibility of a credit rating downgrade for the UK following Kwarteng's mini-budget.
Moody's said it was now not expecting economic growth to return to its potential until 2026, slashing its forecasts for real gross domestic product (GDP) growth next year to 0.3% from 0.9%.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: "Sterling dropped back to $1.06 after reaching $1.08 on Tuesday after the intervention by the IMF, which warned that these deep tax cuts were not only inappropriate with inflation so high, but would fuel inequality.
"The IMF’s move has added to worries that the UK is fast taking on the characteristics of an emerging market economy, and risks ditching its developed country status.
"It’s now not only wracked with trade disruptions, an energy crisis and soaring inflation but it’s also being closely monitored by international body known as the world’s lender of last resort."
On Tuesday, the BoE’s chief economist Huw Pill also warned that Threadneedle Street "cannot be indifferent" to the developments of the past days.
That was seen as a signal that the cost of borrowing will have to go up to protect sterling and keep a lid on inflation.
Pill said that it is hard not to draw the conclusion that recent market uncertainty will require "a significant monetary response."
"It is hard not to draw the conclusion that all this will require significant monetary policy response," he said.
The central bank opted not to intervene with an emergency rate rise on Monday after sterling crashed, saying it didn't expect to take any action until its next meeting in November.
Instead, the Bank said it would assess developments closely and would not "hesitate" to increase rates to bring inflation back to its 2% target.