The UK's blue-chip index fell 2.39 per cent to 5,536 points, led lower by the financial sector with both banks and insurers set to struggle with low interest rates.
"Banks have been hit hard and further steep weakness can not be ruled out in the near-term. Margin pressure is becoming a big concern for the sector," said Jawaid Afsar, senior trader at Securequity. "Earnings results from some big banks have done little to revive investors' confidence."
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Banks were back under pressure after having rebounded slightly yesterday. Barclays dropped 7.01 per cent to 147.85p per share.
Lloyds bank was trading 4.11 per cent lower to 56p per share, and Royal Bank of Scotland was 4.08 per cent lower at 223.5p per share.
HSBC fell 4.81 per cent to 420.15p per share, while Standard Chartered dropped 5.09 per cent to 386.65p per share. Both banks have large operations in Hong Kong and suffered as the Hong Kong market fell due to ongoing concerns over the state of the Chinese economy.
Better news was found at Randgold Resources as the price of gold shot higher. Its share price rose 7.54 per cent to 6,130p.
"Markets are hanging over the cliff-edge. There has been a widespread flight to safe-havens across asset classes with gold, the Japanese yen and government bonds all heavily in demand. The assets most exposed to slowing global growth and negative interest rates are being dumped with bank shares and oil taking the brunt of it," said Jasper Lawler, markets analyst at CMC Markets.
Across the Atlantic US markets plummeted on Thursday morning as investors were spooked by the health of the global economy.