About £38 billion was wiped from the value of blue-chip shares, rocked by poor economic data, ongoing concerns about Iraq and weak corporate updates.
A tough start on Wall Street compounded the gloom and by London’s close, the Dow Jones Industrial Average was off 140 points.
It meant the FTSE 100 Index ended a hefty 159.7 points behind at 3865.4, its lowest finish since July 24.
Hitting trading were bleak updates from computer firm Oracle and fast food giant
McDonald’s, and a profits warning from investment bank JP Morgan.
Barclays shed 36p at 403p, Lloyds TSB was down 38p at 483p, Bradford & Bingley fell 22p at 296p and Royal Bank of Scotland was 92p weaker at £13.60.
Fund manager Schroders slid 47p at 475p, while among the insurers, Prudential tumbled 36p to 360p and Aviva lost 29p at 346p.
Cable & Wireless hit the hi-tech sector with a warning of a revenue shortfall in its key global division and its shares lost 5p at 132p.
Mobile phone giant Vodafone fell 4p at 86p, rival mmO2 shed 1p at 42p and former parent BT eased 3p at 189p.
It was a slightly better showing among smaller stocks, and discount clothing retailer Peacock perked up 2p at 71p after sticking to profits targets. Media group Chrysalis also rose, up 12p to 171p.
In the FTSE 100, the heaviest fallers were Prudential, off 36p at 360p, Schroders, off 47p at 475p, and Reuters, off 22p at 225p.