The FTSE 100 was knocked on Wednesday following a surge in the pound sparked by reports of a pending Brexit deal.
The pound, which has taken a Brexit beating over the past few weeks, rose as much as 1% to around 1.291 against the US dollar.
Versus the euro, the UK currency rose as much as 0.5% but was nearly flat by the stock market close to trade at 1.109.
It came amid reports that Britain and Germany are preparing to drop key Brexit demands, paving the way for a deal in the coming months.
Bloomberg said Berlin is ready to accept a less detailed agreement on Britain’s future trade ties with the EU in an effort to get a Brexit deal done.
However, Downing Street insisted there was no change in the UK’s position on the need for “proper” information about the future relationship to be available by the time Parliament votes on the withdrawal agreement.
Investors were also digesting data from the Office for National Statistics (ONS) which showed activity in the services sector rebounded last month.
The closely watched Markit/CIPS services purchasing managers’ index (PMI) showed a reading of 54.3 in August, up from 53.5 in July.
A reading above 50 indicates growth.
The pound’s surge knocked the FTSE 100, which tends to benefit when foreign currencies are stronger as many of its constituents are multinational firms with overseas operations.
London’s blue chip index ended the day down 1% or 74.58 points at 7383.28 points.
Across Europe, the French CAC 40 and German DAX slumped 1.5% and 1.4%, respectively.
In oil markets, Brent crude prices were down 0.6% to around 77.39 US dollars per barrel as fears about the effect of US tropical storm Gordon on offshore oil platforms subsided.
The commodity was also facing pressure amid slowing global demand.
In UK stocks, Barratt Developments jumped 9.6p to 545.2p after logging a 9.2% rise in annual pre-tax profit to a record £835.5 million.
Barratt said market conditions remain good and the availability of attractive mortgage finance and the Government’s Help to Buy scheme continue to support “robust consumer demand”.
FTSE 250 house building peer Berkeley rose 28p to 3,538p despite warning that London’s property market remains under pressure from high transaction costs, mortgage restrictions and Brexit uncertainty.
It backed guidance to deliver at least £3.4 billion of pre-tax profits for the five years to April 30 2021.
Royal Bank of Scotland rose 3.9p to 250.4p after announcing plans to swing the axe on another 54 branches, due to not being forced to sell its Williams & Glyn business.
William Hill surged 12p to 260.5p as the gambling group agreed a tie-up with US casino giant Eldorado in its boldest move yet to tap into the American market.
Shares in Quiz tumbled 5.5p to 162p after the retailer warned that it will take a £400,000 hit from House of Fraser’s collapse.
Quiz has historically operated 11 House of Fraser concessions and sold its products through the House of Fraser website.
The biggest risers on the FTSE 100 were Royal Mail up 8.6p at 467p, Associated British Foods up 41p at 2,284, Barratt Developments up 9.6p at 545.2p, and Royal Bank of Scotland Group up 3.9p at 250.4p.
The biggest fallers were WPP down 49p at 1,147.5p, Burberry Group down 84p at 2,116p, Coca-Cola HBC down 97p at 2,562p, and NMC Health down 140p at 3,734p.