The FTSE 100 dropped a staggering 217.3 points down to 5,414.4 points (minus 3.9 per cent) on Monday following the shock sale of US bank Bear Stearns to rival JPMorgan Chase. The index finished at its lowest point since late 2005.
Banks suffered the most, with Royal Bank of Scotland falling 8.7 per cent, Barclays 9.4 per cent, Alliance and Leicester 7.2 per cent and HBOS hit hardest losing almost 13 per cent.
Wolseley the building materials company fell 9.2 per cent and Yell group the directories company also dropped 12 per cent.
There were some winners in a day which saw most shares drop. British Energy was up 11 per cent after saying it was in talks for an offer for the company. Phamaceutical companies GlaxoSmithKline and Shire were also up 1.5 and 0.9 per cent respectively.
Miners losses were only slightly less severe than that of the banks, with Xstrata down 5.5 per cent and Kazakhmys dropping 9.3 per cent. Oil company BP also dropped 3.7 per cent.