These comments dealt a blow to sterling bulls who have piled into the British currency in recent weeks and were betting on a more hawkish tone.
"The comment that risks remained to the downside was less hawkish than many people expected. This is hitting sterling," said Shahab Jalinoos, senior currency strategist at ABN Amro in London.
At 1540 GMT, sterling was down over one percent at $1.8760. Against the euro, it was down 0.7 percent at 69.12 pence.
The dollar pushed broadly higher after Federal Reserve Chairman Alan Greenspan said real US borrowing costs remained low, a comment markets interpreted to indicate more US interest rate hikes were ahead. On a trade-weighted index, sterling dropped to 103.0, turning tail from eight-week highs scaled earlier in the week.
Bank of England Governor Mervyn King said the outlook for Britain's economy was still highly uncertain, particularly with regard to consumer spending.
The Bank of England has raised borrowing costs five times between November 2003 and August 2004 but has left rates unchanged at 4.75 percent since then.
"Given the hawkish shift in market expectations recently, this will force the market to reconsider just how likely an interest rise really is," said Daragh Maher, senior foreign exchange strategist at Calyon.
Data earlier in the day showed a larger-than-expected fall in the number of Britons claiming unemployment benefits but wage inflation rising less quickly than some had forecast.