Sterling dived and the FTSE share index was set to fall 1 per cent on Friday after a shockingly bad election result for Prime Minister Theresa May plunged Britain into political chaos days before the start of Brexit talks.

The surprise of a result that raises questions about how Britain will advance with its plan to leave the European Union, and whether any party can form a stable government, initially sank the pound by 2pc against both the dollar and euro.

With May's ability to form a government uncertain for much of the night, the pound steadied in Asian trading before falling sharply again as London traders arrived at their desks around 0530 GMT.

British gilt yields also fell as investors sought the security of government bonds in the face of the uncertainty while spreadbetters predicted London's main FTSE 100 stock exchange index would fall 1 percent at the opening.

“We've got a winner but don't expect the celebration bells to be ringing,” said ThinkMarkets analyst Naeem Islam.

“This is not the kind of outcome which investors were looking for. Although Theresa May has won the election, in reality, it is Jeremy Corbyn who has made substantial progress. This clearly opens the way towards $1.22 in coming weeks.”

By 0530 GMT, sterling was 1.5pc lower on the day at $1.2753 ─ having fallen as low as $1.2693 ─ and 87.78 pence per euro.

Falls for sterling have tended to support London's internationally-focused FTSE 100 blue chip index. With trading volumes still extremely thin, official FTSE futures were up around 0.2pc, having earlier fallen by a similar amount.

An up-to-5-percentage-point fall in gilt yields, however, suggested shocked investors would seek the security of bonds when markets reopened properly in London.

Mohamed El-Erian, chief economic adviser at Allianz, said: “With initial exit polls pointing to the Tories (Conservatives) losing seats and that Prime Minister Mays early election gamble is not paying off, markets are pricing in a more complex outlook for policy implementation, including Brexit.”

No clear winner

The initial exit poll predicted the Conservatives, traditionally favoured by markets as pro-business and fiscally prudent, would win 314 seats in the 650-member parliament and the opposition Labour Party 266, meaning no clear winner and a “hung parliament”.

Later projections gave the Conservatives a handful more seats but a raft of analysts predicted that would not head off more falls for the pound.

“While some have argued that a softer Brexit might ameliorate the downside, there is still the prospect of the contents of the Labour party manifesto,” said Michael Hewson, chief analyst with CMC Markets in London.

“This could well see the pound come under further pressure as well as having consequences for the FTSE100 and FTSE250 when European markets open.”

Investors' traditional views of whether the Conservatives or Labour would be good or bad for the pound, have been muddied in this election, not least by the prospect of Brexit talks due to start on June 19.

Some banks have said a high-spending Labour government could spur economic growth and cause the Bank of England to raise interest rates more quickly.

Some also argue that any Labour-led coalition might aim for a softer deal on Britain's planned departure from the European Union than the “hard Brexit” that markets have worried May would deliver.

“The pound is getting hit ... and that's probably a symptom of uncertainty,” said Jason Ware, chief investment officer at Albion Financial in Salt Lake City, Utah.

“But if we get more of a softer Brexit or more of a globalist stance from the UK... it's good for Europe, the UK and US assets.”