The euro was also under pressure, pulled down by sterling, as Brexit clouded the future of the European Union. Safe-haven currencies like the yen and the Swiss franc extended gains, much to the discomfiture of the Japanese and Swiss central banks.
Sterling was down 1.8 percent at $1.3460, having hit a trough of $1.3228 on Friday, its lowest since 1985. It recovered from a low of $1.3356 struck in Asia on Monday after British Chancellor George Osborne sought to assure markets that he was staying on and that the economy was in good shape.
The pound dropped as much as 11 percent on Friday, its worst day in modern history, as investors betting on Britain remaining in the EU were reversed en masse.
And while the shock and panic appeared to have subsided for now, price swings are likely to be extreme given the lack of clarity on who runs the British government, a likely fresh move for Scottish secession, the response of the EU and its ability to contain calls by anti-EU parties across the continent.
Given all the uncertainty, investors were pricing in a chance of a rate cut with some analysts expecting the Bank of England to consider quantitative easing to cushion the economy.
"The overnight indexed swap market is currently pricing 38 basis points of cuts from the BoE over one-year time horizon," said Petr Krpata, currency strategist at ING, adding investors were also concerned about Britain's large current account deficit, pegged at 7 percent of GDP.
"While we deem sterling as undervalued at these levels, the mixture of political uncertainty, flagging growth and concerns about the current account deficit should keep a lid on sterling during the weeks and months ahead and prevent any meaningful or long lasting recovery."
Many economists have cut growth forecast for the UK. Goldman saw Britain entering a mild recession within a year due to a deterioration in its terms of trade, scaled-back investment and tighter financial conditions because of exchange rate fluctuations, and weakness in risk assets.