Britain's top shares sank to six-week lows on Monday as a U.S. committee looked set to miss a deficit reduction deadline and a ratings agency warning on France compounded worries about the euro zone debt crisis.
In evidence of heightened anxiety, the FTSE 100 volatility index rose 9 percent on Monday, with cyclical energy stocks and miners bearing the brunt of a broad-based sell-off. There were no FTSE 100 gainers.
The banking sector extended its losses as exposure to risky government debt exerted downward pressure on the sector.
Adding to the market jitters, ratings agency Moody's said a recent rise in interest rates on French government debt and weaker economic growth prospects could be negative for France's credit rating.
Royal Bank of Scotland was among the hardest hit, down 2.9 percent, as Espirito Santo cut its rating on the part state-owned UK lender to neutral and slashed its target price to 22 pence from 51 pence.
The broker said it did not expect RBS to meet its cost of capital in the course of 2012 or 2013, and despite being regarded as one of the best recovery plays in the sector due to its depressed share price, found little evidence of a recovery in earnings forecasts.
Across the Atlantic, Republicans and Democrats on a congressional deficit-reduction panel are expected on Monday to declare defeat in their efforts to find $1.2 trillion in budget savings after months of talks failed to bridge deep divides over taxes and spending.
I think we (were already aware of this), but it's being reported with a bit more conviction as such by the media, so it's grabbing a bit of attention. I think it's one of the factors that is driving the market lower, said Martin Dobson, head of trading at Westhouse Securities.
I think also the market is really starting to price in more and more a default by various countries in the euro and a potential break-up of the euro.
The UK benchmark was down 99.79 points, or 1.9 percent, at 5,263.15 by 9:23 a.m.
The index fell 1.1 percent to end at 5,362.94 on Friday, and technical analysis painted a gloomy picture.
James Hyerczyk, analyst at Autochartist, said: With price action pointing lower, the charts appear to be indicating that a break through (the 5,338.40 to 5,360.20) bottoms may trigger the much anticipated 'big break'.
(Additional reporting by David Brett; Editing by Will Waterman)