The top share index retreated on Thursday, with nervous investors ditching riskier assets such as banks and retailers, as corporates showed signs of stress in the face of the intensifying debt contagion in Europe.
London's blue chip index <.FTSE> shed 85.88 points, or 1.6 percent to 5,423.14, with the FTSE volatility index <.VFTSE>, up 10.2 percent showing investors were more pessimistic about the economic outlook.
Banks fell 2.3 percent as funding stress grew in the sector, with the euro zone sovereign debt crisis seeping deeper into countries such as France and markets looking to the European Central Bank to take more dramatic action.
Banks were under pressure from the start of the day after Ratings agency Fitch voiced concern over U.S. banks' European exposure.
That pressure intensified as Spain's bond yields rose to unsustainable levels long-term following a bond auction.
French bond yields rose too after its own bond auction, while Italian yields remained dangerously high on fears Europe's debt crisis could spell the end of the euro.
If the gathering collapse in European bond markets is not arrested, then the economic damage will be greater than equities are discounting, said Andrew Bell, chief executive of the 1.1 billion pounds Witan Investment Trust.
Miners and integrated oils fell too, in tandem with weakening commodity prices as the uncertainty surrounding Europe's debt crisis threatened demand in the sector.
Traders said technical factors pointed to potential further downside for the UK FTSE 350 Mining sector, with a move back to the mid-October lows around 18,700 possible, a correction of some 8 percent from the current levels of 20,360.
Commodities group Glencore
Fred Moore, manager of the Newton European Higher Income Fund, said despite the gloomy macro outlook there were still pockets of value for investors to boost there returns.
The Euro zone crisis remains unresolved but we maintain that this creates even more investment opportunities as stocks were sold indiscriminately over the summer.
He said opportunities existed particularly within the healthcare and telecoms sectors, but was concerned about the prospects for certain banks and the utility sector, although he liked the insurance sector.
With debt contagion sweeping through Europe and governments around the world implementing austerity measures, consumers are feeling the pinch.
FTSE small cap fashion retailer French Connection
Investors, wary that the signs are not promising for retailers in the build up to the important Christmas trading period, sold out of positions in blue chip firms such as Marks & Spencer
Mixed retail data failed to lift sentiment in the sector.
The tough economic conditions in Europe saw brewer SABMiller's
On the macro economic front, there was slightly better news from the world's biggest economy.
New U.S. claims for jobless benefits hit a seven-month low last week, while permits for future home construction rebounded strongly last month, bolstering views the economy was gaining traction.
On the upside, Europe's largest drinks can maker Rexam
(Additional reporting by Tricia Wright; Editing by Mike Nesbit)