Government borrowing costs jumped on Tuesday amid uncertainty over the future of Prime Minister Sir Keir Starmer.
The effective interest rate on borrowing over 10 years briefly hit 5.13%, near levels last seen during the 2008 global financial crisis.
Financial markets have been on edge due to fears higher oil prices caused by the Iran war will push up inflation and lead to interest rate hikes.
But the possibility of a change of leadership in the UK and perceived risk of looser public spending has further unsettled investors.
The UK's main stock index, the FTSE 100, fell 0.5% with shares in British banks leading the declines amid concerns of a tax raid by a potential new administration, and the pound also fell 0.5% against the dollar to $1.35.
