Renewed speculation over the future of Theresa May sent the pound lower against other major currencies.
A report in the Sunday Times said that 40 Conservative MPs had agreed to sign a letter of no-confidence in the prime minister.
Sterling fell 0.64% against the dollar to $1.3105 and fell 0.62% against the euro to €1.1238.
UK shares rose at first before falling back, and by close the FTSE 100 was down 17.81 points at 7,415.18.
“Sterling is suffering today as traders ponder how long Theresa May has left in Downing Street,” said David Madden, market analyst at CMC Markets.
“Whether 40 Tory MPs are actually planning to challenge her leadership or not has yet to be seen, but the talk of it is enough to send sterling lower.”
Outside the FTSE 100. shares in Ultra Electronics sank by nearly 20% after the defence contractor issued a downbeat outlook and said its chief executive had left the company.
Ultra said the UK market had become increasingly difficult in the second half of the year due to budget pressures in defence programmes.
It also announced that chief executive Rakesh Sharma had stood down with immediate effect.
The fall comes on top of an 11% slide in its shares on Friday last week, when the company said a decision on its purchase of US firm Sparton was set to be delayed till March.