Almost £2bn (€2.87bn) was wiped from the value of Sainsbury's today after the retailer said takeover talks with a Qatar-backed investment fund had ended.
Shares in the firm sank more than 19% - or 105p - to 450p as investors bailed out after bid hopes were thwarted for the second time this year.
The FTSE-100 index at 11:45am was down 94.6 at 6436.0 by 11.45am today as fears over banking stocks' exposure to sub-prime mortgage losses continued to overshadow the market.
Investors' nerves were frayed after the American head of banking giant Citigroup resigned overnight and analysts at HSBC downgraded Barclays along with Halifax Bank of Scotland.
Market watchers fear the potential fall-out from the sub-prime mortgage losses for UK banks has not yet been fully priced in after a string of write downs from major investment banks across the Atlantic.
Barclays was down almost 6%, or 30p to 507.5p - extending losses seen last week - while HBOS slipped 25p to 800p. Lloyds TSB fell 12.5p to 505p and crisis hit mortgage lender Northern Rock was off 8.6 to 162.7p.
Morrisons was caught in the fall-out from the failure of the Sainsbury's talks, leaving its shares down 10.25p to 282p. Tesco, which opened its first US store last week, was also down 8.25p at 478.75p after record highs last week.
Among the risers, early pace-setter ITV lost some of its initial gains after rumours of renewed potential interest from private equity firm Apax subsided, leaving the firm 0.4p higher at 96.6p.
The telecoms sector made stronger gains, with an upgrade for Carphone Warehouse from Lehman Brothers offering support ahead of results later this week.
The stock was 4.5p higher at 349.5, while sector peer Vodafone also climbed 2.1p to 186.1p.