The pound rose to a two-month high of €1.194 today as fears grew that more bailouts will be needed for the eurozone.
The euro also slipped to a 10-week low against the dollar, dropping below $1.30 for the first time since early September.
'The market is still extremely nervous about sovereign risk, with Italy now being drawn into the firing line,' said Gavin Friend, currency analyst at nabCapital.
Traders' wariness of the single currency was stoked by comments from Dr Nouriel Roubini overnight, who warned that Portugal is increasingly likely to need an Irish-style international bailout.
Dr Roubini - aka 'Dr Doom' - won notoriety for presciently warning in 2006 of a pending credit crisis.
He gave an interview yesterday with Portuguese business newspaper Diario Economico warning that the country was reaching 'critical point'.
He said both Ireland and Greece at first insisted that they needed no international bailout but finally as market conditions worsened were forced to turn to the European Union and the International Monetary Fund.
'It [a bailout for Portugal] is becoming increasingly likely,' Roubini added. 'Like it or not, Portugal is reaching the critical point. Perhaps it could be a good idea to ask for a bailout in a preventative fashion.'.
Bond markets have piled pressure on Portugal as the eurozone country most likely to need a bailout after Ireland, although few economists are prepared to give an exact time frame on such a move.
On neighbouring Spain, Roubini said Europe has insufficient funding to consider a bailout for Madrid, raising the pressure on Spain to take the necessary measures to avoid having to ask for funding.
'Spain is too big to fail and too big to save,' Roubini said. 'As such, if things turn out of control as seems possible with Portugal, it (Spain) should do everything possible to improve its situation.'
At a conference in Prague yesterday he added: 'The big elephant in the room is not Portugal but, of course, it's Spain. There is not enough official money to bail out Spain if trouble occurs.'
