Fears of debt default in Greece, election upset in Spain and weakness in Italy’s economy caused the FTSE to tank to a two-month low today.
Commodity stocks led the fallers as the FTSE 100 index plunged more than 100 points to close down 1.9 per cent at 5,835.89.
Investors abandoned risky assets after rating agency Standard & Poor’s downgraded Italy’s A+ sovereign debt rating outlook to negative from stable.
S&P said Italy's chronically weak economic growth and lack of reforms undermined its prospects for significantly reducing its huge stock of debt.
The prospect of Greece defaulting on its unmanageable debt burden also remained a source of jitters for investors. It accelerated its programme of privatisations in order to secure its next €12bn (£10.5bn) tranche of international aid.
“It almost seems like a re-run of this time last year when the same factors were weighing on sentiment,” said CMC Markets analyst Michael Hewson.
Oilfield services provider Wood Group fell most, closing 5.6 per cent lower at 625p.
Airlines were also hit by fears that a new volcanic eruption in Iceland may close airspace in northern Europe again as it did for six days last year.
British Airways owner International Consolidated Airlines Group fell 5.1 per cent to 235p while smaller budget airline Ryanair closed down 6.2 per cent at 3.36p.
Miners suffered as a strong US dollar and weaker investor sentiment pulled money out of commodities other than gold.
“Oil prices have slipped back on concerns of falling demand in the face of lower growth after Chinese manufacturing PMI came in at a ten month low,” Hewson said.
“Copper prices have also plunged, sliding back below the $4 mark after closing at $4.12 on Friday, also on the back of fears of a Chinese slowdown and lower demand.”
Softer metals prices caused Anglo American to lose 4.1 per cent and close at 2,830.5p, while copper miner Antofagasta also fell 3.9 per cent to end at 1,160p.
Retailer Next was one of only two FTSE 100 gainers, up one per cent as it recovered from declines made in the previous session. Traders also cited optimism ahead of peer Marks & Spencer's full-year results tomorrow.
Public services provider Capita was the top gainer, up 1.6 per cent to finish at 722p in sympathy with its FTSE 250 peer MITIE, which reported a jump in profits.
MITIE rose five per cent to 220.4p on the news, while FTSE 100 stock Serco also outperformed the wider market with an 0.3 per cent fall to 549p.
US markets also spent the day in the red thanks to the global sell-off and as a stronger dollar hit large exporters and manufacturers.
The Dow Jones industrial average lost 130.78 points, or 1.05 per cent, to 12,381.26. The S&P 500 Index fell 15.90 points, or 1.19 per cent, to 1,319.37.
The Nasdaq Composite Index dropped 44.42 points, or 1.58 per cent, to 2,758.90.