Banks were the biggest fallers across Europe on opening this morning after Greece admitted it will not meet 2011-2012 deficit targets imposed by international lenders as part of the country's bailout.
The sector was down 3.7 per cent on the pan-European FTSEurofirst 300 index, illustrating the problem for financial institutions saddled with burden of the sovereign debt crisis which has left the Eurozone economy in tatters
Among the top losers were BNP Paribas and Credit Agricole, down 7.7 and 6.1 per cent, respectively.
On the FTSE 100 luxury retailer Burberry was the biggest faller, down 5.8 per cent as concerns over world growth, took their toll.
But it was banks which were weighing down the market in London, along with struggling commodities.
Barclays was the second worst performer, down 5.6 per cent as the sector was dented by the Greek crisis. Lloyds was down just over four per cent, with RBS dropping 4.7 per cent.
Miners also started on the back foot as commodity stocks continued to see confidence ebb away. Vedanta was the poorest performer in the sector early on — down just over five per cent.
Safety testing firm Intertek dropped more than five per cent while engineer GKN was down 4.8 per cent.
The only significant riser on the blue chip index was gold miner RanDgold Resources, which edged up by 0.7 per cent.
The gold price nudged up as it re-emerged as a safe haven compared with riskier commodity stocks.
The company was also buoyed by a target price hike by Morgan Stanley.
On the FTSE All-share broker Charles Stanley fell around ten per cent after a market update in which it said its funds had taken a hit from volatile markets over the summer.
The slump on the FTSE 100 followed weakness in Asian markets overnight.
Japan's Nikkei closed down 1.8 per cent while Hong Kong's Hang Seng Index slumped five per cent to its lowest since May 2009.
In UK economic news a council tax freeze in England will be extended to 2012-13 under plans to be unveiled at the Conservative Party conference by chancellor George Osborne.
Meanwhile British manufacturing activity unexpectedly grew for the first time in three months in September, although a slide in new export orders highlighted the dangers facing the sluggish recovery, a survey showed.
The Markit/CIPS manufacturing PMI headline activity index rose to 51.1 last month from an upwardly revised 49.4 in August