By Kylie MacLellan and Anirban Nag
LONDON (Reuters) - Britain's decision to leave the European Union sent new shockwaves through financial markets on Monday, with the pound falling despite the country's leaders' attempts to ease political and economic turmoil unleashed by the move.
Finance minister George Osborne said the British economy was strong enough to cope with the volatility caused by Thursday's referendum, the biggest blow since World War Two to the European goal of forging greater unity.
But his words failed to halt the fall of sterling, which later sank to its lowest level against the U.S. currency for 31 years, continuing the slide that began last week when Britons confounded investors' expectations by voting to end 43 years of EU membership.
European bank shares had their worst two-day fall on record and world stocks, as measured by MSCI were on track for worst two-day fall since thre aftermath of the Lehman Bros collapse in late 2008. With the ruling Conservatives looking for a new leader after Prime Minister David Cameron's resignation on Friday and lawmakers from the opposition Labour party stepping up a rebellion against their leader, Britain sank deeper into political and economic chaos.
"There's no political leadership in the UK right when markets need the reassurance of direction," said Luke Hickmore of Aberdeen Asset Management, expressing the view of many in the City of London financial centre.
Cameron has promised to stay on until October as a caretaker. A committee responsible for running the process of selecting a new leader for his Conservative Party recommended a faster process that should be completed by early September.
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The prime minister sought to calm fears over the fallout of the referendum and said there should be no attempt in parliament, where a majority of members, like him, argued that Britain should stay in the EU, to block Britain's departure.
"I am clear, and the cabinet agreed this morning, that the decision must be accepted," Cameron told parliament, which faces a public petition for a new referendum.
But his refusal to start formal moves immediately to pull the country out of the EU has prompted many European leaders to demand quicker action by Britain, the EU's second largest economy after Germany, to leave the 28-country bloc.
"It should be implemented quickly. We cannot remain in an uncertain and indefinite situation," French finance minister Michel Sapin said on France 2 television.
Guenther Oettinger, a German member of the EU's executive European Commission, said Cameron and his party should not risk causing damage at home and abroad by waiting until October.
"Every day of uncertainty prevents investors from putting their funds into Britain, and also other European markets," he told Deutschlandfunk radio.
MERKEL HAS NO BRAKE, NO ACCELERATOR
While European countries would like to end the uncertainty with swift negotiations, they cannot begin until Britain formally notifies the EU it is planning to exit.
Since Cameron decided to leave that task to his successor, escalating turmoil in both major political parties has created even more uncertainty over Britain's plans for the future and the transition to a new leader.
German Chancellor Angela Merkel she had "neither a brake nor an accelerator" to control events.
She has appeared to take a softer line than some European leaders. But she ruled out informal talks before London notifies the EU of its intention to leave under the EU's Lisbon Treaty, which provides its constitutional basis.
Making clear the exit negotiations would not be easy, Volker Kauder, who leads Merkel's conservatives in parliament, told ARD television: "There will be no special treatment, there will be no gifts."
The shock waves are being felt across the globe at a time when economies are still fragile from the 2008 economic crisis, interest rates are close to zero and central banks have fewer tools than normal to revive demand if countries enter recession.
Chinese Premier Li Keqiang said uncertainties over the global economy had heightened and called for a "united, stable EU, and a stable, prosperous Britain".
Financial markets misjudged the referendum, betting on the status quo despite abundant signs that the vote would be close.
When reality dawned, the reaction was brutal. Sterling fell as much as 11 percent against the dollar on Friday for its worst day in modern history, while $2.8 trillion was wiped off the value of world stocks -- the biggest daily loss ever.
That trumped even the Lehman Brothers bankruptcy during the 2008 financial crisis and the Black Monday stock market crash of 1987, according to Standard & Poor's Dow Jones Indices.
By Monday afternoon, sterling had shed around 3.6 percent against the dollar to $1.3209 despite an attempt by Osborne to ease concerns by saying he was working closely with the Bank of England and officials in other leading economies.
"Our economy is about as strong as it could be to confront the challenge our country now faces," he told reporters. "It is inevitable after Thursday's vote that Britain's economy is going to have to adjust to the new situation we find ourselves in."
U.S. Treasury Secretary Jack Lew also tried to restore calm, telling CNBC television it had been "an orderly impact so far" though he later added: "We have resilience built into our economy, but we're not cut off from the world."
Visiting Brussels, U.S. Secretary of State John Kerry said it was important that "nobody loses their head" as the EU and Britain deal with the fallout from the referendum.
"PENSIONS ARE SAFE"
The vote to leave the EU has increased the likelihood of Scotland holding a second referendum on independence, after voters there strongly backed remaining in the EU.
Boris Johnson, a leading proponent of a Brexit and likely contender to replace Cameron, praised Osborne for saying "some reassuring things to the markets".
The former London mayor said it was now clear "people's pensions are safe, the pound is stable, markets are stable. I think that is all very good news."
But financial markets took a different view. The yield on British 10-year government bonds fell below 1 percent for the first time as investors bet the Brexit vote would trigger a Bank of England interest rate cut aimed at steadying the economy.
Many economists have cut economic growth forecasts for Britain, with Goldman Sachs expecting a mild recession within a year. The risks affect economies far beyond Britain.
"Against the backdrop of globalisation, it's impossible for each country to talk about its own development discarding the world economic environment," China's Li told the World Economic Forum in the city of Tianjin.
Japanese Prime Minister Shinzo Abe instructed his finance minister to watch currency markets "ever more closely" and take steps if necessary.
DIVIDED PARTIES
The referendum revealed social as well as economic stresses in divided Britain.
Immigration was one of the main themes of the campaign, alongside discontent with the political establishment in general and the Conservatives in particular. Many Brexit backers complained the EU had allowed uncontrolled numbers of migrants to arrive from eastern Europe.
Police said offensive leaflets targeting Poles had been distributed in Huntingdon, central England, and graffiti had been daubed on a Polish cultural centre in central London on Sunday, three days after the vote.
According to a local newspaper, the Cambridge News, the leaflets said "Leave the EU/No more Polish vermin" in English and Polish.
The Polish embassy in London said it was shocked by the "xenophobic abuse" aimed at the Polish community and others.
With Britain now facing uncertainty over how its trade relationship with the EU will unfold, Johnson tried to calm fears by writing in the Daily Telegraph newspaper that there would be continued free trade and access to the single market.
He suggested Britain would not have to accept free movement of workers, saying it could implement an immigration policy which suited business and industry.
However, single market rules stipulate that countries must accept the free movement of people as well as goods. Yielding on immigration would anger many Britons who voted to leave.
Johnson is expected to declare soon that he is running to lead the Conservatives, who have been divided for decades between pro- and anti-EU factions.
Divisions within the opposition are also deep. A wave of Labour lawmakers resigned from leader Jeremy Corbyn's team on Monday, adding to the 11 senior figures who quit on Sunday, saying his campaign to keep Britain in the EU was half-hearted.
Corbyn, a left-winger who has strong support among ordinary party members, has said he is going nowhere.
(Additional reporting by David Lawder, William James, Jamie McGeever, Nigel Stephenson, Kevin Yao, Costas Pitas, Bate Felix, Andrea Shalal, Michael Holden, Guy Faulconbridge, David Milliken, Patrick Graham, Anirban Nag, Michelle Martin, Paul Carrel, Conor Humphries, Minami Funakoshi and Tetsushi Kajimoto, Writing by David Stamp and Philippa Fletcher, Editing by Timothy Heritage and Peter Graff)