Sterling hit a fresh 19-month low against the dollar and lost half a percent versus the euro on Thursday after a series of blasts rocked London killing at least 33 people and wounding hundreds.
British interior minister Charles Clarke said "there have been a number of terrorist attacks," while Prime Minister Tony Bair said the incident was an apparent terror attack coinciding a meeting of Group of Eight leaders in Scotland.
"The situation seems to be under control but it still looks bad. On the whole, the market is consolidating for the moment," said Chris Gothard, currency strategist at Brown Brothers Harriman.
At 1420 GMT, sterling was trading at $1.7446, having hit the fresh 19-month low of $1.7403 earlier in the session and was at 68.44 pence per euro, compared with six-week lows of 68.92 set in the wake of the London blasts.
European Central Bank President Jean-Claude Trichet said major central banks held talks after the blasts and were satisfied financial markets are still functioning. The Bank of England said it had not provided extra liquidity to the market after the blasts.
Some analysts said financial markets were pricing a greater chance of rate cut by the Bank of England after the explosions despite the central bank decision on Thursday to leave rates unchanged at 4.75 percent for the 11th month running.
"In a way it is a surprise because following today's events some people were saying the BoE might want to pre-empt any effect this could have on consumer spending," said Adarsh Sinha, FX strategist at Barclays Capital.
"If this is confirmed as terrorist attacks it will hit consumer confidence and household spending, which in any way is deteriorating. The general outlook on UK interest rates is not great and an August interest rate cut is priced in anyway."
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