Among European currencies the pound enjoyed safe-haven status away from ERM tension, rising fractionally against the German mark. But sterling suffered against a strong dollar, trading in late afternoon at a three-and-a- half year low of dollars 1.4972.
The pound may be boosted today by the latest Gallup survey of consumers for the European Commission, which provides more evidence that an economic recovery in Britain is approaching.
Consumer confidence rose last month to its highest level since before the pound was forced out of the ERM in September, the Gallup figures show. The composite index of consumer confidence - which reflects how optimistic people are about the economy and their own circumstances - rose to minus 22 in December, from minus 27 the previous month.
Foreign exchange dealers lost no time attacking those ERM currencies seen as devaluation candidates. Trading volumes quickly regained pre-Christmas levels.
The Irish punt was pinned to its floor against the system's strongest currency, the Belgian franc, forcing the Belgian central bank to intervene in its support.
Irish overnight interest rates trebled to 45 per cent, with newly lifted exchange controls no longer providing a defence for the currency. 'The punt will probably be the first to go. Those sort of rates are not sustainable,' Neil MacKinnon, of Citibank, said.
The French franc also came under pressure, with the Bank of France and the Bundesbank launching support-buying operations before it hit its floor. The Bank of France is already estimated to have spent about Fr90bn ( pounds 11bn) defending the franc in the run-up to Christmas.
The franc fell by a centime yesterday to Fr3.4167 against the mark - its floor is Fr3.4305. The intervention succeeded in stabilising the currency, but failed to reverse its drop. French overnight interest rates rose about two percentage points to about 12.5 per cent and the currency tension hit Paris share prices.
The markets believe the franc might have to devalue or pull out of the system because the Bank of France is having to maintain high interest rates at a time when unemployment in France is about 10.5 per cent, industrial production is falling and economists believe the country will be lucky to see 1 per cent growth this year.
'France is going to need an inordinate amount of good luck to make it through to its election on 17 March without something breaking - either interest rates or the currency,' George Magnus, of Warburg Securities, said.
Last night Michel Sapin, the French finance minister, said France and Germany were working together to try to lower interest rates. 'This cause (of market instability) must disappear, this high level of interest rates must come down,' he told French radio. 'That's what the discussions, the conversations, the collaboration between our two monetary authorities is organised around.'
But economists in Frankfurt believed the Bundesbank was unlikely to provide room for manoeuvre on interest rates by cutting its own at Thursday's council meeting.
One source of comfort for the ERM was the strength of the US dollar, which limited flows of funds into the mark. The dollar rose by 2.6 pfennigs to close at DM1.6135. The US currency has gained ground in recent days on growing optimism that recovery there is safely embedded and accelerating.
There was more good news on this front yesterday with Commerce Department figures showing that US construction spending rose by 2.1 per cent in November.
Hopes of economic recovery in Britain and lower German rates helped push the London stock market to a record high. The FT- SE index of 100 leading company shares rose by 15 points to close at 2,861.5.
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