Financial stocks led the FTSE 100 sharply lower on Tuesday, after the Greek Prime Minister's call for a referendum on the bailout package agreed last week sent shockwaves through markets and heightened tensions over debt contagion.
London's blue chips <.FSTE> fell 122.65 points or 2.2 percent to 5,421.57, echoing similar falls across the globe as investors deserted riskier assets on concerns a Greek 'no' vote could be catastrophic for the euro and the banking system.
By calling a referendum, Papandreou has given 12 million Greeks a decision that has massive and potentially devastating ramifications for the 500 million inhabitants of the European Union, Louise Cooper, markets analyst at BGC Partners, said.
The Greek government faced possible collapse after Prime Minister George Papandreou shocked investors and angered fellow EU leaders by letting Greeks vote on the 130 billion euro (111 billion pound) bailout package, with voters already deeply disenchanted with austerity measures.
Expressing concern at Papandreou's snap decision to call a referendum, Jean-Claude Juncker, the chairman of the Eurogroup countries said Greece could face bankruptcy if the population ends up voting against the bailout.
German and French leaders are due to meet their Greek counterparts ahead of the G20 summit on Thursday.
Having gained just over 8 percent in October, the UK's benchmark has fallen 5.1 percent in three trading days and back into the range -- 5,000 to 5,450 -- that it had previously struggled to breakout of between August and October, when investors were baying for politicians to bring an end to the euro zone debt crisis.
With gains having been capped at the 200-day moving average of around 5,710 on Thursday, the FTSE is now attacking the 50-day moving average support level of around 5,310.
Investors responded to the uncertainty brought on by Greece by ditching risky equities and piling their cash into safer assets such as German and UK government bonds.
Yields, however, in 10-year Greek and deeply indebted Italy and Spain government bonds rose as the risk that the countries would be unable to repay their debts grew.
The FTSE volatility index <.VFTSE>, a gauge of investor fear, which had stabilised after the announcement of the EU rescue plan last week, shot up 25 percent.
Those with the most to lose should EU countries begin defaulting fell furthest. Banks <.FTNMX8350> fell 3.5 percent and insurers <.SXIP> shed 7.2 percent.
Hedge fund firm Man Group
Sentiment among financials was further dented as investors fretted over potential exposure to MF Global
And the mood further darkened as Credit Suisse
Europe's debt woes weighed too on global factory activity, which slowed down in October on weak demand for exports, raising the risk that the debt crisis could drag the global economy into recession.
The prospect of slowing demand, particularly from Asia, and falling metal and oil prices sent mining <.FTNMX1770> and integrated oil <.FTNMX0530> stocks spiralling lower.
On the miners, Citigroup said: Under current economic conditions the mining sector is looking more fully valued. While we are not changing our fundamental 12-month view on the stocks, we would recommend being more cautious on the sector on a 3-6 month view.
Among individual stocks Marks & Spencer
David Morrison, market strategist at GFT Global, said with the vote in Greece potentially up to three months away he feared further market volatility and falls were inevitable.
He said what has potentially kept the market dipping further on Tuesday was the prospect the European Central Bank might cut interest rates on Thursday and the U.S. Federal Reserve launching further quantitative easing measures on Wednesday, to try to relieve some pressure on the global economy.
Among the few risers were stocks that underperformed the recent market rally, with Reckit Benckiser
(Editing by Jon Loades-Carter)