Shares in Scotland’s companies and financial institutions such as the Royal Bank of Scotland and Standard Life also took a hammering.
On Sept. 18, Scotland’s residents vote on a referendum over whether to end Scotland’s 307-year-old union with Britain.
Investors seemed sanguine about the coming vote when the anti-independence side seemed to be ahead, but the latest YouGov poll suggesting supporters of independence had a narrow lead was a shock to the market.
At one stage Monday, the pound had fallen 1.4 per cent to $1.6104 US, its lowest level since November and down from $1.66 just last week. It fell one per cent against the euro to €1.2480.
A vote in favour of independence would take both Scotland and the U.K. into uncharted waters and cast doubts over the future of the pound.
Pro-independence politicians have said Scotland would keep the pound after independence, despite British treasury head George Osborne’s assertions that that would not be possible. The idea of both countries using the pound would create questions of how to set monetary policy.
Even if the U.K. says no, Scotland could use the pound informally without control over policy, as it could any currency. Another possibility is a move to the euro.
Analysts believe a pro-independence vote could derail Britain’s economic recovery, which has been much stronger than in Europe, and plunge Scotland into a recession.
Barclays said in a research note that the vote for independence was just "the opening chapter" in what would be a protracted period of uncertainty.
There will be "uncertainty over issues ranging from the timelines for political and economic independence, resultant institutional frameworks, lender of last resort for Scotland, the division of assets and liabilities, fiscal impact and policies, and what currency choices Scotland will have available and choose," Barclays wrote.
Among the stocks hit by the news were Lloyds Banking Group, which owns Bank of Scotland and Scottish Widows, which fell 2.7 per cent, and Scottish-based firms such as energy supplier SSE, Glasgow pumps specialist Weir Group and fund manager Aberdeen Asset Management.
Pro-independence politicians say Scotland's economy could be more stable after independence — in part because of its many resources.
The latest poll is a big wake-up call for investors who had not yet priced in the risk of a vote in favour of independence," said Alexandre Baradez, chief market analyst at IG France.
On Tuesday, Britain's three main political parties will meet to talk about offering Scotland even more financial independence, including greater tax-raising powers, under the terms of the current union.
Many Scots favour that option — known as maximum devolution, or "devo max" — but it is not on the referendum ballot, which asks whether Scotland should become an independent country.
U.K. Deputy Prime Minister Nick Clegg, in a bid to boost the yes side, said the government would offer "far greater powers for Scotland, but within the security and stability that the family of nations in the United Kingdom provides."
Independence advocates accuse the No side of overstating the economic risks of separation.
"Nobody argues that it is a magic wand that is going to pave the streets with gold," said Scotland's deputy first minister Nicola Sturgeon. "[But] I don't think there's any doubt at all the momentum is with the Yes campaign."Suggest a correction