Sterling tumbled to a 15-year low against the dollar and fell against the euro amid speculation that Labour will use a landslide victory today to push for early entry into the single currency.
The run on the pound was triggered by a report in yesterday's Independent that Tony Blair would kick-start a pro-euro campaign as early as September.
Economists said the pound could now fall as low as 64p against the euro equivalent to almost three German marks. This would put it close to an exchange rate that many in the business community believe to be sustainable.
It dropped more than two cents against the dollar yesterday to hit $1.3896, its lowest since February 1986. Against the euro it fell from 60.3p to 60.77p or DM3.22. David Bloom, global economist at HSBC, said: "This election has been dull but it has certainly sparked into life on the currency markets."
Nick Stamenkovic, European analyst at Nomura International, said: "The pound has taken a pummelling on the speculation that a sizeable majority will clear the way for a referendum."
Economists warned that sterling would suffer intense volatility as the markets second-guessed what Tony Blair would do with a new majority. Michael Derks, the chief international strategist at Commonwealth Bank of Australia, said there was "some potential" for the euro to hit 64p.
Mr Bloom said the markets would push the pound towards an acceptable exchange rate. "We think that is DM3, so we have a long way to fall against the euro." The Confederation of British Industry (CBI) said DM2.90 was the "maximum acceptable" exchange rate. However, the Engineering Employers Federation (EEF) said it was "unrealistic" to expect anything lower than DM3-3.10 equivalent to 63p.
Mr Bloom said sterling was losing its status as a currency "close to Europe but not in the euro" and was vulnerable to further falls across the board. The pound could also be undermined by further rate cuts. The Bank of England kept rates unchanged at 5.25 per cent yesterday but business groups were quick to press for a swift cut after the election.
The EEF will publish a survey just two days before next month's Bank meeting, showing that confidence among hi-tech manufacturers has collapsed in the face of the US slowdown and a strong pound.
The EEF, whose members employ almost a million people, said there had been a "significant downturn in people's expectations".
Meanwhile official figures on manufacturing, published later today, are expected to show that the sector contracted again in April.
Stephen Radley, the EEF's chief economist, said: "Manufacturing will be looking for further cuts in the near future should conditions continue to deteriorate."
John Cridland, deputy director-general of the CBI, said a cut over the summer would "help cushion the UK against the combined impact of a weak euro, a slowing global economy and foot-and-mouth disease".
The Trades Union Congress went further. Ian Brinkley, its senior economist, said: "British manufacturing badly needs a cut in rates to restore confidence."
Fresh ammunition for a rate cut came from a survey from the Recruitment and Employment Confederation showing a marked easing in the labour market.Reuse content