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The pound fell to a three-decade low against the dollar on Tuesday, trading below the levels it hit after Britain voted to leave the European Union in June and spurring predictions of further volatility.

The currency fell by more than 0.8% to a low of $1.2736 in European trading hours, reaching almost 15% below where it traded on June 23, the day the U.K. went to the polls. The pound was trading down against the euro at €1.1409, at its lowest level since 2013.

The latest stage in the pound's decline came after Prime Minister Theresa May set a March date for the U.K. to begin exiting the EU and said full access to the country's largest trading partner was a lower priority than controlling immigration. Her statement raised concern over Britain's ability to retain access to the common EU market and the potential impact on crucial sectors such as financial services.

Sterling has barely risen above $1.34 since the referendum, as investors fret about the effects of Brexit on the British economy and the likelihood of further Bank of England action to support growth.

But on an upside-down day for British markets, the country's leading share index, the FTSE 100, headed toward a record high, as investors saw the benefits of a weaker currency for the benchmark's companies, which make over 70% of their profits abroad. The FTSE 100 closed up 1.3%.

Currency strategists expect further volatility in sterling as London and Brussels negotiate the terms of Britain's exit.

"The tone that Prime Minister May used has been uncompromising, and suggests the chance of a hard Brexit, leaving the EU without good trade terms in place," said Robert Wood, U.K. economist at Bank of America Merrill Lynch. "That's what sterling has been focusing on for the past two days."

The beleaguered pound is now one of the worst-performing major currencies against the dollar. Most currencies of the Group of Ten industrial economies, the 10 most commonly traded in foreign-exchange markets, are up against the greenback this year. Yet the British pound is down 13.4% against the dollar, more than even the Mexican peso, which has fallen 10.4% because of concerns over the outcome of the U.S. presidential election.

Analysts and lawmakers continue to debate the effects of the weaker pound on the British economy.

Economic data in the months following Brexit has mainly been better than expected. The pound's weakness is one reason why, given that it makes British exports more competitive. On Monday, the September purchasing managers index for manufacturing came in at 55.4, its highest level in two years. Any reading above 50 indicates that a sector is growing.

But many analysts believe that the good run of data won't last, exposing the pound to further weakness.

"The recovery in several gauges of sentiment and activity after the immediate shock has prevented more material declines, but in our view it is only a matter of time before less positive data starts to appear," said John Wraith, head of U.K interest-rates strategy at UBS Group AG.

The weakness of the pound has also sent inflation higher, particularly in the sectors of the economy most exposed to currency shifts, such as fuels and materials. Overall import prices rose 9.3% year over year in August.

Higher inflation could make it harder for the Bank of England to support the economy with further rate cuts and other stimulus. At the same time, it would make life more expensive for the British.

The pound's fall means that the FTSE's rally hasn't been all good news for investors abroad.The FTSE is up by 11.6% since the June 23 referendum, but the decline in sterling means the index is still down by 3.9% in U.S. dollar terms over the same period. The S&P 500 is up more than 2%.

As investors increasingly turn to the positions that the U.K. and EU are staking out ahead of next year's Brexit negotiations, the focus is likely to shift away from shorter-term economic data, some analysts say.

The pound's recent stumble was sparked on Sunday, when Mrs. May said in a speech at her Conservative Party's annual conference that regaining control of immigration policy was a nonnegotiable priority. That puts her at odds with her EU counterparts, who have frequently said that Britain must allow freedom of movement to EU citizens if it wishes to keep access to the common market.

A Downing Street spokeswoman declined to comment on sterling's fall.

"I'm struck that we're now pricing sterling more off the 12-24 month outlook for politics, so the fact that the PMIs are a little bit better doesn't matter so much," said Kit Juckes, global head of foreign-exchange strategy at Socié té Gé né rale SA.

Many U.K. lawmakers who had supported Brexit were sanguine about sterling's fall on Tuesday.

Graham Brady, a Conservative lawmaker, said there will be short-term reactions to the vote but that sterling would stabilize over the longer term.

"Over a period of time, we will see currency fluctuations against the dollar and the euro, and in due course the pound will settle at an appropriate level," he said from the Conservative party conference in Birmingham.

Write to Mike Bird at Mike.Bird@wsj.com

(END) Dow Jones Newswires

October 04, 2016 12:45 ET (16:45 GMT)

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