The franc soared against the euro and Swiss stocks plunged more than 13 percent by midday after the removal of the Swiss franc-euro floor was announced by the central bank.
After appreciating more than 30 percent, by mid-afternoon the franc was nearing parity with the euro (valued at 1.02 francs) and rose as much as 14 percent against the US dollar.
"The minimum exchange rate was introduced (in September 2011) during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets," the SNB said in a statement.
"This exceptional and temporary measure protected the Swiss economy from serious harm," it said.
"While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate," the central bank said.
"The economy was able to take advantage of this phase to adjust to the new situation."
The bank noted that the euro has "depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar".
In these circumstances, the central bank said it concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is "no longer justified."
The bank was set to hold a press conference to further explain its actions at 1.15pm.
The unexpected decision caught business leaders off guard and angered those in the export sector, as well as unions who fear the decision will result in job losses.
"I'm lost for words," Nick Hayek, head of Swatch group, the Swiss watch giant, is quoted as saying by broadcaster RTS on its website.
Hayek said SNB President Thomas Jordan's surname is the same as the Jordan River — "what the BNS has provoked — it's a tsunami, as much for the export sector as for tourism but also for all of Switzerland".
The value of Swatch shares dropped 14 percent by noon.
Shares in Nestlé, the world's largest food company, dived by 7.5 percent and bank stocks also tumbled — Credit Suisse shares fell ten percent and those of UBS by 8.73 percent.
The move also caught financial experts by surprise.
"We did not expect this," UBS chief economist at UBS Daniel Kalt told German-language broadcaster SRF.
"I am in shock," Kalt said. "This is strong medicine."
Adding to the surprise is the fact that as recently as Monday, the SNB had maintained that it planned to prevent the franc from appreciating at all costs by continuing a policy it has pursued for more than three years.
"We are convinced that the floor rate will remain a pillar of our monetary policy," Jean-Pierre Danthine, the bank's vic-president said.
The about-face also took international observers by surprise, with one expert saying the move was an effort to counter deflation in Switzerland.