Financial data company Markit's purchasing managers' index (PMI) survey suggested growth in the sector had slowed in the first three months of this year, as export orders increased more slowly and demand for consumer goods faltered amid accelerating inflation.
The manufacturing PMI slipped to a four-month low of 54.2, undershooting a forecast of 54.6 in a Reuters poll and marking the third straight month of falls.
Sterling, whose 20 percent tumble since last June's vote to leave the European Union had helped manufacturers enjoy their fastest annual growth in three years during the final quarter of 2016 as the currency hit 31-year lows, fell below $1.25 after the survey's release, down from $1.2534 beforehand and leaving it down 0.6 percent on the day.
"Clearly the data was disappointing, and this is sterling behaving as it should," said Barclays currency strategist Hamish Pepper. "It was a very strange environment that we found ourselves in post-Brexit, where data was irrelevant."
"What we've seen building this year is that we have the currency behaving in a normal, rational way - data surprises to the downside result in weakness and to the upside result in strength. That makes it an easier currency to deal with."
The pound has stabilised this year, trading broadly in a range of between $1.20 and $1.27. And traders and analysts say that now that the formal process in which Britain will depart the EU has been triggered, focus is returning from politics to fundamentals.
One of the main concerns around the economic effect of Brexit had been Britain's huge current account deficit, which swelled to as high as 7 percent last year.
But data last week showed an almost halving of Britain's current account deficit as a percentage of output, and a rise in foreign direct investment to 110 billion pounds, offering hope that one of the economy's big vulnerabilities may be fading.
Against a broadly stronger euro, the pound slipped 0.7 percent on the day to 85.39 pence.
Data released on Friday from the Commodity Futures Trading Commission showed speculators trimmed their record-high bets against the pound in the week to last Tuesday.
"The short is finally shrinking, but is still huge," wrote Societe Generale macro strategist Kit Juckes.
"That probably leaves us in no man's land for a while longer but we still like euro/sterling longs for the long run, pairing two 'cheap' currencies and buying the one that isn't sticking pins into a wax image of its economy."