Hung parliament fear in markets hits the pound

The pound fell sharply today after a surge in support for the Liberal Democrats increased the chances of a hung parliament.

Sterling recorded its biggest drop in two weeks against the US dollar as opinion polls suggested no party will win an overall majority in the general election on May 6.

One poll showed the Lib-Dems in the lead as voters warmed to leader Nick Clegg following his performance in last week's live debate with Gordon Brown and David Cameron.

The City is concerned that a hung parliament would lead to political paralysis as party leaders haggle over the shape of the next government. Investors fear that this could hamper efforts to reduce the budget deficit from a record 11.8 per cent of gross domestic product, putting Britain's AAA credit rating at risk.

Mark Bolsom, head of UK trading at Travelex, said: "Rightly or wrongly, the markets believe a split vote will hamstring the government when they come together to create a workable plan for reducing the deficit. Essentially, the markets are apolitical. They don't seem to mind who wins the election. What they really want to see is a decisive working majority."

The pound fell 1.50 cents against the dollar to $1.5212 and 0.53 cents against the euro to 1.1324. Sterling has lost seven per cent of its value against the dollar this year.

City bookie Extrabet today cut the odds on a hung parliament from 11/8 to 4/6; the odds on a Conservative majority lengthened from 5/6 to 6/4.

Extrabet's Chris Shillington said: "It's an extraordinary turnaround. City boys have been queuing up around the block to back a hung parliament following Clegg's performance on TV last week,. 11/8 into 4/6 says it all."

Cabinet ministers are braced for evidence of weak economic growth this week. Jobless statistics on Wednesday could show a rise in the overall number out of work and an increase in those unemployed for more than 12 months is expected.

On Friday, quarterly output figures are likely to confirm that Britain is back into growth though at a slow pace. Economists are forecasting a 0.4 per cent increase in GDP in the first quarter of this year.