The FTSE 100 plunged below 5,000 for the first time since 7 July 2010 as the crisis of confidence in world markets deepened.
The latest plunge came after indices across Europe had opened on the front foot before returning to a downward spiral.
Rallying calls form President Obama failed to limit the damage caused by the US suffering a credit rating downgrade while the Eurozone's finances were on life support provided by the European Central Bank.
Banks were the biggest losers on the FTSE which was engulfed in a sea of red yet again.
RBS was down 5.6 per cent while Barclays dived by 5.3 per cent. Lloyds was down 4.5 per cent with HSBC dropping around 3.5 per cent in a dire start to the session.
Schroders careered down by more than five per cent in a bruising start for the financial sector as a whole.
Consumer giant Tate & Lyle lost six per cent while International Power was also among the five biggest losers on the blue chip index, down by more than five per cent.
The only gainer of note on the market was InterContinental Hotels Group which beat forecasts and gave an upbeat assessment on future business.
Meanwhile Asian markets had recovered around half of their overnight losses by the close of trading, but still finished down.
The Nikkei finished down 1.7 per cent, South Korea's Kospi down 3.64 per cent, and Hong Kong's Hang Seng down two per cent.
Across Europe markets have been paralysed with fear of buying riskier assets.
The VDAX-NEW volatility index surged as much as 16.7 per cent on Tuesday and jumped to its highest level since early March 2009.
World stocks have racked up a 20 per cent loss since early May. Meanwhile the gold price has continued to surge as investors pile into so called safe havens.
But in a rare bright spot UK retail sales grew at their fastest annual pace since April last month, helped by greater discounting, the British Retail Consortium said.