Banking shares led the FTSE 100 down this morning as the eurozone crisis drained confidence from investors while fears over the US credit rating also cast a shadow.
The Greek debt crisis deepened as Eurozone leaders continued to thrash out options to save the country's economy.
Officials proposed a range of schemes for Europe's bailout fund, the European Financial Stability Facility, to finance a buy-back or a swap in which private owners of Greek government bonds - banks, insurers and other investors - would accept cuts in the face value of their holdings.
But investors in financial stocks remained unconvinced that significant progress was being made and took shelter in less risky stocks.
The price of gold topped $1,600 an ounce for the first time.
Results from the latest stress tests for European banks, which were better than expected with only eight failing, did not lift the gloom.
Meanwhile rating agency Moody's called on the US to scrap its debt ceiling to shore up it's bonds.
Banks were the biggest fallers on the FTSE 100 with RBS losing almost four per cent in early trading. Barclays was down three per cent and Lloyds 2.4 per cent.
Man Group, the world's largest hedge fund manager, slipped 2.4 per cent after announcing that it would pay more than £200m to cover Lehman exposures, in an attempt to reassure investors.
Completing the table of top five biggest losers was bank and asset manager Investec, down 2.18 per cent.
Other shares dropping included commodities giant Glencore, which slipped by 0.7 per cent after the company announced that it was buying copper assets in Peru for £295m.
On the upside miners performed strongly with Fresnillo and Randgold Resources edging up.
Imperial Tobacco was up marginally while chip maker Arm Holdings was the fastest climber, up 1.2 per cent.
In significant market news elsewhere shares in Rupert Murdoch's News Corporation, at one point dropped by a two year low of 7.6 per cent.
Shares touched A$13.65 in Sydney before recovering slightly to finish the day's trading down 4.1 per cent. The slide comes as an investigation into phone hacking in the UK widens.