The London market fell nearly 1.5% today after hopes faded that the US would announce more quantitative easing to inject fresh life into its economy.
The FTSE 100 Index had made gains of nearly 1% in earlier trading but a weak opening on Wall Street saw the London market slide suddenly downwards, closing down 74.8 points at 5131.1.
This brought to an end a three-day rally which had been underpinned by hopes that Federal Reserve chairman Ben Bernanke would use a key speech tomorrow to indicate more stimulus measures.
But a bearish mood overtook markets today, partly because economists decided Mr Bernanke is unlikely to announce such measures because inflation is too high.
A rise in weekly US jobless claimants added to the downbeat mood. Even a move by legendary investor Warren Buffet to snap up $5bn (€3.47bn) worth of shares in struggling Bank of America failed to spark any buying enthusiasm.
Market jitters also intensified on rumours that Germany could be stripped of its top credit rating, although all three ratings agencies rapidly denied this.
The pound was down against the dollar and the euro at 1.63 and 1.13 respectively.
Gold, which is seen as a safe haven amid the economic turmoil, crept back up to 1737 dollars an ounce, although it is still a long way off the 1912 dollar peak earlier this week.
London's banks made gains after being spurred on by better-than-expected results from French bank Credit Agricole.
Barclays topped the risers board, lifting nearly 6%, or 8.3p at 157.9p, while Royal Bank of Scotland was 1.2p higher at 23.1p, and Lloyds Banking Group improved 0.9p to 31p.
They were joined on the risers board by drinks giant Diageo after strong demand in emerging markets helped the Guinness and Smirnoff maker to lift full-year profits by 5% to £2.36bn (€2.67bn).
The dividend for the year went up by 6% to 40.4p and chief executive Paul Walsh indicated that the company's medium-term targets could lead to "even stronger dividend growth". Shares were ahead 5% or 52p at 1170p.
Set against that was another gloomy UK retail survey, this time from the CBI, which showed sales falling in August at the fastest pace in more than a year.
High street bellwether Marks & Spencer fell 4%, or 14.7p, to 316.1p, clothing rival Next dropped 37p at 2243p and B&Q parent Kingfisher lost 7.9p at 223.3p.
Insurer Admiral was a heavy faller for the second day running, losing more than 5% over worries over referral fees and rising personal injury claims. Shares were down 74p at 1279p.
The biggest Footsie risers were Barclays up 8.3p at 157.9p, Royal Bank of Scotland ahead 1.2p at 23.1p, Kazakhmys up 49p at 997p, and Diageo ahead 52p at 1170p.
The biggest Footsie fallers were Admiral Group down 74p at 1279p, Hargreaves Lansdown off 21p at 404.4p, Man Group down 10p at 206.1p, Marks & Spencer off 14.7p at 316.1p.