Market hit by hung parliament

The pound and the London stock market bore the brunt of a major sell-off today as the UK faced the uncertainty of a hung Parliament.

The lack of a decisive election victory sent the pound plunging 2% to below 1.45 against the dollar and 1.14 against the euro at one point as the political manoeuvring began.

Greece's debt crisis also convulsed stock markets with the FTSE 100 Index enduring its worst week since March 2009, falling 7.6%

In one of the most volatile sessions since the financial meltdown 18 months ago, the Footsie swung wildly from a 2% fall early on to positive territory before another 4% plunge. The Footsie eventually closed 2.6% down at 5123 - wiping £35.5 billion off shares.

Sterling fell to a year low as Gordon Brown said civil servants would offer support to parties in coalition talks, fuelling fears of political paralysis and delays in tackling the UK's deficit.

But the pound recovered some ground after pledges by all three main party leaders to act in the "national interest" - as well as a "big, open and comprehensive" offer to the Liberal Democrats from Conservative David Cameron to form a stable Government.

Lib Dem leader Nick Clegg also stuck by his campaign pledge to give the party with the most votes and seats - the Conservatives - the first chance to seek to govern.

Ratings agency Standard & Poor's - which has been threatening to strip the UK of its triple-A sovereign rating - also offered some respite after saying they would reserve their judgment on the new Government's fiscal rescue plans until the end of the year.

But currency traders warned the result was likely to mean more volatility for sterling in the days ahead. Currencies Direct dealer Phil McHugh warned: "We are now facing unchartered waters.

"If something clear and decisive does not get through very quickly the ramifications are likely to be a further sell-off of the pound and a potential downgrade for the UK's credit rating," he added.

Despite positive news on US jobs, traders focused on the Greek debt woes and sent the Dow Jones Industrial Average down 1.5%.

In London banks were among the worst hit stocks with Royal Bank of Scotland and Lloyds Banking Group showing falls of more than 5%.

Austerity measures in return for a bail-out to avert bankruptcy were voted through in Athens yesterday - and the funds were approved by the Germans today - but doubts over Greece's ability to deliver the plan have widened into fears over the crisis spreading to Portugal, Spain and even the UK.

Jonathan Loynes, chief European economist at Capital Economic, said Greece's pain showed there was "little room for complacency" in the UK.

"The quicker the new Government, whoever it is, offers reassurance that it is serious about tackling the fiscal crisis, the better."

The pound's weakness and official figures showing factory gate prices rising at the fastest rate for 18 months also prompted concern over the return of inflation - leading to possible interest rate hikes from the Bank of England and choking off a fragile recovery.

Douglas McWilliams, chief executive of the Centre for Economics and Business Research, said of the pound's fall: "If the slide continues, the MPC will almost certainly have to raise base rates to hit their inflation target."

The Bank's Monetary Policy Committee (MPC) is meeting today to make its latest policy decision, which will be announced on Monday.