Sterling was more than two cents lower against the dollar at less than $1.28 in the wake of Dominic Raab’s resignation as Brexit secretary – and it was also down by two cents against the euro at €1.13.

In the stock market, Royal Bank of Scotland and Barclays led the fallers, dropping 7%, while big housebuilders such as Barratt Developments and Persimmon each slumped by 6%.

The wider FTSE 100 was less heavily affected, with the pound’s fall providing a boost to the sterling value of the top-flight’s multinationals, whose earnings are largely in foreign currencies.

The second-tier FTSE 250 index, which has more of an exposure to the UK economy, was down by about 1%.

Chris Beauchamp, chief market analyst at IG, said: “As the steady drip of resignations hits the government, the UK’s deal with the EU appears to be dead in the water already.

“Risk appetite has taken a hit across the board.”

The falls for banking stocks came after state-backed RBS revealed last month that it was putting aside £100m to guard against a “more uncertain economic outlook” ahead of Brexit.

Housebuilders have also revealed their exposure to the uncertainty, with Taylor Wimpey saying earlier this week that there were “signs of customer caution” and that it expects sales volumes will fail to grow next year.

At the same time, house price growth has slowed sharply.

Retailers were also hit on Thursday, with Marks & Spencer down 6% and rival Next by 5% – with the market also reacting to weaker-than-expected retail sales figures for October.

Currency markets have been in a volatile mood in recent weeks amid the changing prospects for a Brexit deal.

The pound had crept above $1.30 against the dollar on Wednesday after it emerged that UK and EU officials had agreed a draft deal, with gains only muted given the difficult task of winning political backing for it.

Ratings agency Moody’s has described the agreement as a positive step but warned that it was “far from the end of the process” and that its passage through parliament was far from certain.

Colin Ellis, Moody’s chief credit officer for Europe, Middle East and Africa, said: “If the UK parliament does not support the agreement then – in the absence of further developments – the EU and the UK will be heading for a ‘no-deal’ Brexit by default.

“As we have said previously, that would have significant negative consequences for a range of issuers.”

Experts including the Bank of England expect a sharp shock to the economy if there is a no-deal withdrawal and the UK’s independent fiscal watchdog has drawn comparisons with the impact of the three-day week in 1974.

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