The pound has hit a fresh 31-year low against the dollar as markets remain edgy in the wake of the Brexit vote.
Analysts blamed a disappointing report on the UK services sector, and ongoing uncertainty about the effects of the UK's vote to leave the European Union.
There was caution on Wall Street as well, where shares closed lower.
In London, shares in property firms and asset managers dropped sharply after insurance giant Aviva become the second firm in two days to suspend trading in a UK property fund following the Brexit vote.
Aviva said the freeze would take place immediately due to "extraordinary market circumstances".
On Monday, Standard Life Investments suspended trading in its UK property fund.
Mark Priest from ETX Capital said: "Investors are getting very nervous now... the last time we saw this kind of action was in the financial crisis.
"Fears about the investment industry are leaching into the forex markets today, with sterling seeing heavy selling again after a few days of relative calm after the Brexit vote collapse."
The Bank of England has eased special capital requirements for banks, potentially freeing up £150bn for lending.
The FTSE 100 closed 23.11 points, or 0.4%, higher at 6,545.37. The FTSE 250 - which contains more UK-focused companies - was also off its lows for the day, but still closed 382 points or 2.4% lower at 15,734.68.
Among property shares, housebuilder Persimmon fell 7.2% despite it reporting a rise in half-year revenues.
The company said it was "confident" about its prospects, and that it was too early to say how the UK's vote to leave the EU would affect the sector.
But the news from Standard Life Investments, followed by Aviva, cast a shadow across the entire property sector. Shares in Barratt Developments fell 9.8% while Berkeley Group closed 6.4% lower.
Standard Life Investments said the number of investors asking to withdraw their money had increased following the EU referendum vote.
"The suspension was requested to protect the interests of all investors in the fund," it said in a statement.
The £2.9bn fund invests in a mixture of commercial real estate in the UK, including office blocks, shopping centres and warehouses.