Miners led the decline after a series of broker downgrades amid fears over China, as well as a fall in commodity and oil prices, compounding concerns over global growth.
The Ftse was down nearly 3%, or 172.9 points, at 5935.8.
Sentiment was hurt further as official figures showed that Britain’s deficit spiralled to £12.1bn (€16.7bn) last month, marking the widest August shortfall in government funding for three years.
Mining group Glencore was the biggest faller on the Ftse, down almost 11%, or 12.7p, to 106.4p, with Anglo American also off 46.8p at 648.1p.
RSA Insurance was the only riser in the top flight as it edged 2.9p higher to 406.2p after losing more than a fifth of its value on Monday after rival Zurich pulled out of a £5.6bn takeover.
A raft of stocks were lower in the second tier amid profit warnings and disappointing results.
The AA was 13% lower, down 43.7p to 289.6p, after revealing it slumped into the red with half-year losses of £63.6m and said its turnaround could be held back by new insurance premium taxes and EU employment legislation.
Weak summer trading at AG Barr also saw it alert over profits, with the group now expecting annual results broadly in line with the previous year.
Shares fell almost 6% or 32p to 530p.
The only riser on the Ftse was RSA Insurance.
The biggest fallers were Glencore, Johnson Matthey down 204p at 2318p, Antofagasta down 41p at 524.5p, and Anglo American down 46.8p at 648.1p.
The Dax in Germany dropped 3.8% and France’s Cac 40 was 3.4% lower as European markets were also hit by the escalating Volkswagen emissions rigging scandal, which one market analyst described as an “auto sector shaking incident”.
Volkswagen shares were down another 18% in Germany after a 19% plunge on Monday.