The UK blue-chip index fell 80 points, or 1.1%, to 7,198, as the pound jumped 0.6% against the dollar to $1.397 on the news.
A stronger pound tends to hamper the FTSE 100 as its companies rely on overseas markets for around three-quarters of their revenues.
As expected, the Bank of England kept interest rates on hold at 0.5%, but said projections in today's inflation report suggested rates may need to rise sooner than it had thought at the time of the last report.
'Were the economy to evolve broadly in line with the February inflation report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report, in order to return inflation sustainably to the target,' the Bank's monetary policy committee said.
Ian Kernohan, economist at Royal London Asset Management, said the Bank's stance 'significantly raises the risk of a rate hike in May'.
Ben Brettell, senior economist at Hargreaves Lansdown, agreed. 'It now looks like the next rise could happen as soon as May - the next time the Bank's economic forecasts are due to be updated,' he said.
'Prior to today's announcement, markets were factoring in a 50% chance of a rate rise in May, and an 80% chance they'll be higher by the end of the year.'
The FTSE 100 had already been trading lower ahead of the Bank's interest rate decision and publication of the inflation report, as investors banked profits from yesterday's sharp recovery, after a late slump in trading in the US yesterday sparked jitters the stock market sell-off may not be over.
Volatility has spiked across global stock markets after Monday's sharp falls in US markets, with the Dow Jones registering its biggest one-day points fall in history. The index's 4.6% slump was the biggest in percentage terms since August 2011.
Markets had surged into recovery mode yesterday, but US markets, which had been buoyed by the strong performance of European indices, ran out of stem as trading drew to a close, ending lower on the day.
'Equity markets in Europe are in the red as traders lock in profits from yesterday's positive move,' said David Madden, market analyst at CMC Markets UK.
'The weak finish in the US last night left traders feeling uneasy on this side of the Atlantic, and the optimistic sentiment that dominated yesterday has subsided. Traders are often nervous about holding a firm long position in the wake of a severe sell-off, and today's move is proof we are not out of the woods yet.'
Miners fell to the bottom of the index, as metal prices dropped. Fallers included:
- BHP Billiton (BLT) -3.4% at £14.61;
- Randgold Resources (RRS) -3.4% at £60.06;
- Antofagasta (ANTO) -2.8% at 875p;
- Glencore (GLEN) -2.3% at 369.6p;
- Rio Tinto (RIO) -2.8% at £37.72.
The FTSE 250 index of 'mid-cap' shares fell 0.2%, with shares in Sophos (SOPH) down 17% at 516p, as the cloud services and network security provider reported slower billings growth.
TalkTalk (TALK) was down 10.5% at 107.2p as the broadband provider cut its dividend and announced plans to raise £200 million to strengthen its balance sheet.
'Small-cap' stocks inched lower, but shares in Nanoco (NANON) surged 51.4% to 35.8p after the nanotechnology company signed a supply and development agreement with an undisclosed US company.