The FTSE 100 initially fought back this morning as investors found new confidence in banking shares after the European Central Bank (ECB) moved to stabilize the beleaguered Spanish and Italian economies.
Italian and Spanish bonds are being bought by the ECB to avoid a potentially catastrophic debt default by the two countries.
Bond yields fell for the pair today after the intervention had an immediate impact on the market.
Banks led London's blue chip index up early on as investors tentatively returned to stocks although the prevailing atmosphere was one of caution.
However, by mid morning stocks were heading down again.
RBS and Lloyds climbed more than 4.5 per cent in early trading to be the FTSE 100's highest risers. Meanwhile Barclays was up three per cent.
The increases came after a torrid week in which the banks' results were put in the spotlight as their exposure to bad debt — particularly in Greece and Ireland — was laid bare.
Some miners also enjoyed a bounce back, with Fresnillo up 3.29 per cent, although it was a mixed start for the sector.
Rolls-Royce was another of the early winners, lifting by more than two per cent.
On the down side miner Eurasian was the biggest loser, down 2.45 per cent. Rio Tinto also slipped after announcing a proposed £950m deal to buy out Coal & Allied.
Among blue chips Imperial Tobacco also slipped.
Overnight, markets in Hong Kong and Japan slumped by around two per cent after the US lost its Triple A rating sending shockwaves across the globe.
Attention will later turn to US markets to gauge the effect of Standard and Poor's controversial downgrade at the weekend.
Ahead of the opening bell gold bullion hit another record high as investors ran for cover, buying up the so-called ‘safe haven' investment.
Traders were also turning their attention to the Federal Reserve's next policy-setting meeting tomorrow, which may signal renewed efforts to support the struggling US economy.
Meanwhile July's US employment index will be released later today, following up on positive jobs data announced on Friday.
European shares reversed earlier losses and traded higher on Monday morning, with traders saying the European Central Bank was in the market buying bonds issued by Italy and Spain.
Spain's IBEX 35 index surged 3.6 per cent and Italy's FTSE MIB rose 4.4 per cent, while the pan-European FTSEurofirst 300 FTEU3 was up 0.6 percent at 981.30 points after falling as low as 961.32 earlier.