With Tony Blair's majority forecast at around 180 seats according to the BBC's exit poll, equity strategists and traders were betting on the FTSE 100 index opening between 80 and 100 points down when dealing starts later today.
However, foreign exchange dealers were speculating that sterling would strengthen. As the exit poll predictions flashed up on trading screens around the City, sterling gained ground against both the dollar and the german mark.
A senior market-maker at NatWest Markets said: "It looks like a Labour landslide which is not good for equities. It's doom and gloom. The markets would not mind a majority of 50 to 100 seats but anything over that is not good."
The dealers are apprehensive about the prospects of higher corporate taxation and an attack on the tax credits of institutional shareholders should Labour win with a large majority.
However, Stuart Frost, currency strategist at NatWest, said the foreign exchanges appeared to have taken the exit polls in their stride, pushing sterling up to $1.63 and DM2.81.
"I think the instinct will be to push sterling higher against European currencies if anything. The market has been expecting a Labour victory so this is not a shock. I think we will see sterling initially remaining stable against the mark and above DM2.80 followed by a wait-and-see policy in the foreign exchanges."
A gilts trader said last night: "A Labour victory is very much priced in but the markets will be quite jittery."
Another said: "Too big a majority suggests we could see some very unpopular policies being rail-roaded through."
Sterling firmed in thin early Asian trading as exit polls pointed to a Labour victory.
As the country went to the polls yesterday there was fresh evidence of the strength of the economy. The news helped shares close at a record high, although trading was quiet and nervous thanks to caution about the outcome of the election.
The monthly survey of purchasing managers in industry showed that fears of recovery being derailed by the strong pound are, so far, unfounded.
The index of activity picked up in April. Output and home orders increased sharply because of booming demand. Export orders continued to increase, although at a slower pace than the previous month.
The FTSE 100 index ended 9 points higher at 4,445. A bout of election- day nerves hit currency traders, however.
The pound fell more than a pfennig to just over DM2.79 as the markets were swept by an after-lunch rumour of exit polling showing the Conservatives ahead in marginal constituencies.
The resulting bout of jitters was explained as fear of a hung parliament and all the resulting uncertainties. A drop in the dollar also helped push the pound lower. But one analyst said, definitely off the record: "We are all such Tories here that we just want to believe the Government can snatch victory from the jaws of defeat."
Most of the big securities houses in the City were open throughout the night to deal with business from overseas investors as the result of the general election unfolded. Deals transacted in the small hours will be disclosed this morning.
Yesterday's economic figures concentrated the minds of City economists on the possibility of a rise in interest rates shortly after the election. David Owen at Kleinwort Benson said: "In a perfect world we would have tax increases to hold back consumer spending, but as it is, the markets are looking for an increase in interest rates."
The next meeting between the Governor of the Bank of England, Eddie George, and the incoming chancellor is scheduled for 7 May, but some analysts speculated it could be postponed after a Labour victory. But even if this did happen, and there was no indication that it would, the Bank of England's inflation report is due to be published on 13 May and is still expected to call for an increase in the cost of borrowing.
The purchasing managers survey showed that the pound's strength had not yet damaged the recovery in industry, with weakness on the export front offsetting overheating in the home market.
Peter Thomson, director-general of the Chartered Institute of Purchasing and Supply, said: "This appears to be an almost perfect scenario for the manufacturing economy." There was steady growth without inflationary pressure.
"The strong pound has stifled demand just enough to keep a lid on things," he said.
The index of activity in manufacturing increased slightly to 53.1 in April, with an increase in output and orders behind the improvement. The output index was almost unchanged at 56.2, well above the "break-even" level of 50.
Growth in export orders slowed while growth in home orders more than compensated for it. The index for total orders was 55.3, close to its average for the past few months. At the same time, the prices index was unchanged at 40.5.Reuse content