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Sterling fell to a 10-month low while British shares and government bonds showed strains on Monday, as a poll put the campaign for Scotland to split from the rest of the UK in the lead for the first time -- just 10 days before the final vote.
With a ceasefire in Ukraine tentatively holding and markets underpinned by Chinese stimulus hopes and last week's salvo of ECB support measures, European investors were left mulling a potentially messy divorce in the UK that, up until now at least, most had viewed as an unlikely risk.
Another eye-catching mover was Brent crude as it fell below $100 a barrel, having posted its third weekly drop in four weeks last week.
Traders fingered disappointing Chinese data which stoked speculation about whether authorities would have to loosen policy further to revive demand in the world's second biggest economy.
But in Europe, attention was focussed on Scotland's Sept. 18 vote on whether to break away from the rest the United Kingdom. A weekend poll showed the "Yes" to independence campaign on 51% versus 49% in the "No" camp.
Though it excluded those who would not vote and did not know how they would vote, it overturned the 22-point lead the unionist campaign had just a month ago and showed the momentum now being carried by the split side.
It rattled sterling which saw its biggest fall in 13-months on the dollar in Asia to $1.6169, though there was little movement beyond that in early European trading.
London's FTSE, however, was the region's worst performing bourse down 0.4% with 6 of its 10 biggest fallers based in Scotland while bond markets saw UK yields tick up.
"The pound is predictably taking a hit, my base case is still that there won't be a split but should there be a yes vote the pound will look vulnerable because of the 12-18 months of uncertainty that would lie ahead," said Neil Williams, chief economist at UK-based fund manager Hermes.
Though the uncertainty was largely confined to the UK, it gave the rest of Europe a chance to cash in on some of the previous week's strong gains. The European Central Bank's new salvo of support measures announced on Thursday continued to weigh on the euro and kept core euro zone bond years hovering at all-time lows.
Risk sentiment was also generally supported after Friday's lacklustre US jobs report was interpreted as suggesting the Federal Reserve may opt to hold off on hiking US interest rates anytime soon.
The S&P 500 hit a fresh closing high on Friday and high-flying emerging market stocks, which tend to be highly sensitive to US monetary policy predictions, made 0.2% gains on Monday in-line with the Nikkei in Japan.
DELICATE CHINA
Chinese markets were closed on Monday but Chinese trade data was released that supported bets on new stimulus from Beijing. An unexpected fall in imports raised concerns about tepid domestic demand in the world's second largest economy.
In contrast to sterling's sharp moves, other major currencies were treading water. The dollar was steady on the day at 105.09 yen, remaining shy of its near six-year high of 105.71 touched on Friday.
The euro also steadied at $1.2943, holding above last week's 14-month low of $1.2920. Net short positions in the euro ballooned in the week ended Sept. 2, rising to their largest in more than two years, according to Commodity Futures Trading Commission data released on Friday.
"The less extreme positioning in sterling and the looming Scottish referendum may mean that sterling lags behind the euro during the days ahead," Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, said in a note to clients.
On the commodities front, spot gold was flat at $1,268.61 an ounce, well above a three-month low of $1,256.90 hit on Friday before the US jobs data.
