The British pound plunged 6 percent in Asian trade, apparently triggered by a computer program, which spooked traders until the market steadied and it regained some of its losses.
The currency suddenly dived as low as $1.1819 from $1.26 before recovering about half an hour later and steadying at $1.24.
Traders said they were uncertain on what had caused the sudden dive, with some saying it may have been a computer reacting to a Financial Times online story about France's President Francois Hollande demanding "tough Brexit negotiations" with Britain.
All eyes have been on the pound in recent weeks, following the UK referendum which voted in favor of leaving the EU.
Angus Nicholson, a currency analyst at IG in Melbourne, told the BBC that a computer, programmed to initiate a sell order on bad Brexit news, may have been the cause.
"Possibly a keyword or a newsflow-focused algorithm started the selling in the pound based on that article, and other algorithms may have seen the volume and momentum coming into the pound at what is normally a relatively low volume time," he said.
"That may have brought in other algorithms which compounded the selling, created a feedback loop that resulted in a flash crash," Nicholson said.
"It's difficult to know exactly what triggered it," he added.
By mid-morning UK time the pound was trading at about $1.24, still down 1.5 percent on its value before the flash crash.
Other traders said the sudden dive could have been what is called a "fat finger trade" when a trader enters a wrong number manually.
