Sterling fell sharply against the dollar and euro yesterday, hurt by a new bout of political uncertainty that soured the outlook for a currency already reeling from weeks of turmoil over whether Britain will stay in the EU.

Sterling headed for its biggest weekly decline in more than a month against the dollar late yesterday as UK prime minister David Cameron stepped up efforts to reach a deal with fellow European leaders over the terms of UK membership of the bloc.

Stock markets in Europe and the US have tumbled again, a day after a Federal Reserve pledge to keep extremely low interest rates for two more years temporarily calmed investors’ jitters.

Shares tumbled again today as many global markets entered official bear market territory after one of the worst days on Wall Street since the collapse of Lehman Brothers in 2008.

In London, European government bonds have regained losses in thin trading.