The pound reached its highest level against the US dollar since last week's General Election, as weaker American inflation and retail sales data weighed on the greenback.
Sterling shot up 0.4% versus the US dollar to reach 1.280 for the first time since June 8, but fell 0.16% versus the euro to trade at 1.135.
Sterling's ascent against the greenback weighed on listed multinationals on the FTSE 100, which tend to benefit when foreign currencies are stronger. London's blue chip index fell 0.35% or 26.04 points at 7,474.4.
US data released on Tuesday showed inflation contracting by 0.1% in May, while month-on-month retail sales fell by 0.3%.
Investors were also awaiting an interest rate decision from the US Federal Reserve.
Jasper Lawler, a senior market analyst at London Capital Group, said: "A double dose of soft economic data sent the US dollar plunging and gold rallying before the Federal Reserve rate decision.
"Slowing inflation and flat retail sales add to the growing sense that today's meeting could see the last US rate rise this year."
Across Europe, the French Cac 40 fell into the red to end the day down 0.35%, while the German Dax rose 0.3%.
In oil markets, Brent crude prices tumbled 2.8% to 46.88 US dollars per barrel as Energy Information Administration (EIA) data pointed to larger than expected US gas and crude inventories and forecast that energy supplies from non-Opec members would outstrip demand next year.
Commodity stocks followed crude prices lower to hold the bottom spots on the FTSE 100.
Anglo American fell 28.5p to 1,059p, while Glencore dropped 7.65p to 286.65p, and Rio Tinto slumped 75p to 3,142.5p.
Elsewhere, Mulberry Group shares tumbled 49p to 1,100p despite reporting a 21% rise in annual pre-tax profits to £7.5 million and an 8% rise in revenue.
Experts said investors were disappointed by weak like-for-like sales at the start of the new financial year.
WHSmith shares jumped 47p to 1,791p as the retailer reported an 8% rise in total sales in the 15 weeks to June 10, while Gemfields shares surged 5.25p to 40.75p after Chinese conglomerate Fosun tabled a £220 million takeover offer for the Faberge owner.
Shares in Bellway jumped 170p to 3,020p as the housebuilder reported a 13% rise in reservation rates in the four months to June despite General Election jitters.
Waste management firm Biffa saw shares slump 2.75p to 193.25p after reporting an £18.7 million annual pre-tax loss, weighed down by the cost of its stock market flotation.
TalkTalk climbed 6.9p to 175.4p. The telecoms giant revealed in its annual report on Wednesday that former boss Dido Harding earned £1.1 million in annual pay and bonuses, just weeks after warning over profits.
The biggest risers on the FTSE 100 were Barratt Developments up 18.5p to 594p, Centrica up 5.9p to 202.9p, Direct Line Insurance Group up 10.4p to 364.3p, and Old Mutual up 5.5p to 204.7p.
The biggest fallers on the FTSE 100 were Anglo American down 28.5p to 1,059p, Glencore down 7.65p to 286.65p, Rio Tinto down 75p to 3,142.5p, and BP down 8.55p to 461.6p.