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In the first minute of trading, the FTSE 100 share index was down 1.3% at 5,193. That followed a drop of 1.5% on Thursday, when world markets were gripped by a fear that Greece's debt crisis could derail the global recovery.
The British pound traded as low as $1.4449 by late morning, down from $1.51 less than 24 hours earlier.
Beyond the global turmoil created by the debt crisis, the incomplete election returns worried investors _ with no party claiming a majority, it was unclear what the next government's approach would be to slashing a ballooning debt while nurturing a so-far feeble recovery from recession.
The potential lack of a strong government "does not bode well for implementing the harsh cuts that need to be implemented to cut the budget deficit," said Marc Ostwald at Monument Securities in London.
The opposition Conservative Party claimed the largest number of seats, though short of a majority. Possible options include a minority government led by the Conservatives, coalitions involving the Conservatives or possibly a multiparty coalition excluding them.
"The worst thing for markets would be a coalition government failing in a few months and a new election being called," said James Knightley at ING Bank. "This would intensify the pressure on ratings agencies to downgrade the UK's sovereign rating from AAA and make fiscal consolidation even more difficult."
"The emergence of a minority government would leave some residual uncertainty about the outlook for economic policy as the passage of any necessary legislation may be more difficult to navigate than if the government had an outright majority. As such, this outcome seems likely to lead to some volatility in asset prices unless and until the ability of the new government to operate effectively is established," said Simon Hayes at Barclays Capital.
He added that if a Conservative or Conservative-led administration were to emerge, bond prices, equity prices and the pound could all rise.
Douglas McWilliams, chief executive of the Center for Economics and Business Research, said the pound's slump threatened an end to Britain's long period of record low interest rates. The Bank of England's base rate has held at 0.5% since March 2009.
The Bank's rate-setting Monetary Policy Committee began its monthly meeting on Friday, and will announce its latest decision on Monday. Inflation is currently at 3.4%, well above the Bank's target of 2%.
"The pound has fallen by five cents in the past three days," McWilliams said. "If the slide continues, the MPC will almost certainly have to raise base rates to hit their inflation target."
- AP
