The pound has continued to make gains against sterling, easing the position of the authorities and importers. The pound rose after sterling and the dollar continued to fall against the deutschmark, amid growing uncertainty about future UK interest rate rises. It also fell against the deutschmark, easing its position in the Exchange Rate Mechanism.

Bond and equity markets also suffered some fall-out from the decline in the dollar and sterling. Wall Street, whose relentless rise to new peaks has helped drive European markets higher, lost more than 100 points or 1.3 per cent on the Dow Jones industrial average inside 15 minutes of the New York opening. The Dow finally closed at 8,031.22, down 156.78 points.

Sterling fell to DM2.9235 from DM2.9695 on Thursday, on heavy selling from UK high street banks, large US funds and some profit-taking, traders said.

While the pound rose above 91p sterling, closing at 91.05p from 90.46p, it fell further against the mark easing its position in the ERM band. The pound closed at DM2.6655 from DM2.6883 a day earlier after briefly touching a one-month low at DM2.6543 earlier in the day. The pound also eased to 10.8 per cent above the weakest currency in the system, the French franc from around 13 per cent in recent weeks.

Traders said the British currency was still suffering from the Bank of England's statement that interest rates, at 7 per cent, are consistent with the government's medium-term inflation forecast.

Mr Oliver Mangan, senior economist at AIB Capital Markets, said the pound was tracking sterling's falls against the deutschmark. However, as the possibility of a revaluation is receding into the distance the pound has found it easier to fall within the ERM, he added.

Dealers said attention would now focus on a raft of UK economic data due next week. UK producer prices, retail prices and employment data are all due for release. The market will also pay close attention to the Bank of England's quarterly inflation report due for release on Wednesday, they noted.

Mr Mangan said that the interest rate increases so far this year, the sharp rise in the currency and the sharp decline in the budget deficit are likely to produce a slowdown in the economy next year which would send sterling sharply lower.

"Windfall spending from building society flotations may underpin consumer spending but once that washes out of the system any slowdown could trigger a more long-term fall in sterling," he said.

Of course, much will also depend on the future direction of the deutschmark. Bundesbank Council member Mr Ernst Welteke, speaking on German radio yesterday, said the central bank had already signalled it thought the dollar's correction was completed at DM1.7.

This drove the dollar down early on. But traders eventually focused more on the fact that he also said slow German economic growth and high unemployment meant it was not appropriate to "turn the interest rate screw". Speculation that the Bundesbank will act to raise money market rates has grown as the dollar has scored near eight-year highs in recent weeks.

There was also nervousness that the central bank could intervene to stem the deutschmark's slide after Mr Welteke said the Bundesbank had no exact date for intervening in currency markets, dealers said.

Losses on the London stock market promptly reached 1.5 per cent with the index closing down 55.5 points or 1.07 percent at 5,031.3.

Irish bonds also slipped back as falling US Treasuries hit markets across Europe.