The FTSE 100 continued its downward spiral this morning as banking stocks plunged amid escalating fears that the global economic recovery was being derailed.
Investors piled into gold to take it to yet another record price as equities took a hammering across the globe.
A raft of grim economic data plus the ongoing eurozone debt crisis has sapped confidence.
However UK public borrowing figures dropped in July according to official figures out today, giving a crumb of comfort amid the gloom.
In Germany the Dax index was down 4.1 per cent to its lowest level since late November 2009.
The grim trend was followed on London's blue chip index on opening with the market falling below 5,000.
Lloyds was down by eight per cent while Barclays and RBS plunged by five per cent. HSBC dipped by 0.2 per cent.
Oil services provider John Wood Group was hit after JP Morgan cut its rating to "neutral" from "overweight", triggering a 5.9 per cent share price fall.
The falling oil price also contributed to the decline with Tullow Oil down by five per cent as fears over demand drying up weighed heavily on the sector.
On the upside, UK software group Autonomy saw its shares surge by 75 per cent after it was revealed that Hewlett-Packard is buying the firm in a £7.1bn deal.
iPhone chip maker Arm Holdings also enjoyed a lift of more than two per cent while another software company Sage Group was also up by around two per cent as the tech sector enjoyed a boost.
Precious metals miner Fresnillo also made the top five climbers, up just over one per cent.
Meanwhile FTSE 250-listed Stagecoach was up around 1.4 per cent after it announced that it would be giving back £340m to shareholders.
Asian stocks closed down with Japan's Nikkei down 2.5 per cent, triggered mainly by fears that the US was lurching back into recession.
Meanwhile spot gold soared to above $1,850/oz as investors turned to as a so-called safe haven amid the turbulence on world markets.
In contrast oil prices continued to drop as investors bet that slower global growth would dent demand for crude.