Pound takes dive as fears grow over hung parliament

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The pound was down 1.35 cents to $1.5161 and 0.47 cents to 1.1297 after an ICM opinion poll showed the Conservative lead over Labour at just four points.

A YouGov poll put the Tory lead at 10 points but that did little to settle nerves in the currency markets about a hung parliament, where no party has an overall majority.

Investors fear such an outcome would lead to political paralysis and delay action to cut Britain's record deficit of 11.8% of gross domestic product.

Rating agencies have warned that if the deficit is not slashed dramatically Britain will be stripped of its AAA rating, which would spell disaster for the pound and the economy.

Audrey Childe-Freeman, currency strategist at Brown Brothers Harriman, said: "Politics are taking centre stage in the UK. The ICM poll has highlighted political uncertainty, which is weighing on sterling today."

The threat of the first hung parliament since 1974 has helped knock sterling down almost 10% against the dollar this year alone as investors worry about a weak government's ability to tackle the UK's yawning debts.

"If the opinion polls narrow further, sterling bears may feel more confidence to sell the currency with a renewed vigour," said strategists at Credit Agricole in a note.

Malcolm Barr of JPMorgan said the UK's fiscal position looked "significantly worse" now than in the Seventies when it was bailed out by the International Monetary Fund. But he claimed that the country would fare better in the event of a hung parliament this time around because of far greater political will to cut spending.

"All three major parties have explicitly recognised the need for fiscal consolidation," he said.