Shares in Tesco at one stage fell as much as 17 per cent to their lowest in around 14 years, wiping some £2.6bn off the firm’s market capitalisation. It later regained some ground to close 6.6 per cent lower at 174.90p.
Tesco blamed its lower profit forecast on the cost of trying to recover from an accounting scandal and a slide in its market share.
The FTSE 100 index ended 2.1 per cent down at 6,529.47 points -- near its lowest in a month. The FTSE also suffered its biggest one-day fall since a 2.8 per cent drop on 15 October.
However, in spite of the market pullback, Charles Hanover Investments’ partner Dafydd Davies still expected the FTSE to rally to 6,800 points by the end of 2014.
Tesco’s tumble had a knock-on affect in the rest of the retail sector.
Sainsbury slipped 1.78 per cent to 231.60p, Morrisons was down 4.43 per cent at 176.70p and Ocado lost 4.53 per cent to 334.80p.
Banks came under pressure on worries about the effect of another Eurozone crisis on their balance sheets.
Barclays dropped 3.5 per cent to 238.50p and Lloyds Banking Group ended 2.33 per cent lower at 78.54p.
With the recent plunge in oil and base metal prices, commodity companies continued to come under pressure, with BHP Billiton down 1.64 per cent at 1,413.50p.
Afren fell 5.94 per cent to 38.82p, while Enquest ended down 4.08 per cent at 40.95p.
But with investors seeking havens, gold moved higher and pushed Randgold Resources 3.56 per cent higher to 4,335p and Fresnillo up 2.45 per cent to 733p.
Security group G4S added 2.12 per cent to 279.8p after Credit Suisse moved from neutral to outperform, but Shire slid 1.81 per cent to 243.50p as Bank of America Merrill Lynch cut from “buy” to “neutral”.
Coca-Cola HBC, the bottling business, dropped 5.27 per cent to 1,329p on concerns about its operations in Greece and Russia.
Lower down the market, cloud computer company Iomart – where Cinven made and then withdrew a 300p a share takeover bid earlier in the year – slumped 21.54 per cent to 178.50p despite reporting 27 per cent growth in full year profits to £8m.