At the close, the FTSE 100 index was down 85.03 points, or 1.6 per cent, at 5,129.62, having bounced off the session low of 5,059.22.
Banks were weaker after a volatile session as investors digested the much-anticipated Independent Commission on Banking (ICB) report on reforming the sector.
Part-nationalised Royal Bank of Scotland and Lloyds Banking Group shed 3.4 per cent and 1.5 per cent respectively, while Barclays fell 1.6 per cent, albeit with all three well above hefty session lows.
Barclays’ shares hit a 52-week low earlier in the session.
“It seems that the ideas in the report have been touted around for so long that it is no longer news. We all knew about the ringfencing of banking divisions so the whole thing has not surprised us in the slightest,” said James Hughes, senior market analyst at Alpari UK.
Global banking heavyweight HSBC shed 2.4 per cent, with the sector weighed also by Eurozone debt concern and by talk of a downgrade for French banks.
But emerging markets-focused lender Standard Chartered bucked the trend, adding 0.7 percent.
“With the exception of Standard Chartered, the implications of the ICB report are negative to long-term return on equity prospects for all UK banks,” Shore Capital said.
Integrated oils were the biggest drag on the blue-chips, with BG Group down 2.2 per cent.
Miners suffered similar falls in tandem with copper prices , which fell to one-month lows on concern about policymakers’ ability to permanently solve Europe’s debt crisis and worries about economic and demand slowdown.
While Greece pledged fresh measures over the weekend to help it meet fiscal targets and secure bailout funds, a hardening in the tone of some German politicians over the possibility of a Greek debt default unnerved markets.
Azad Zangana, strategist at Schroders, said the market had arguably overreacted to the news, especially as the weekend moves on the part of Athens should smooth the way for bailout funds to be disbursed.
“What has changed has been the tone out of Germany, with the minister of finance talking about the need to think about the default scenario playing out," Zangana said, although he viewed the news as precautionary.
Market heavyweight Vodafone was also a big drag, with the mobile telecoms operator losing 2.5 per cent after a report said Verizon Communications had ruled out a return to a recurring dividend from the two companies’ US mobile phone joint venture.
US blue-chips were 0.6 per cent lower by London's close, well above sharper early falls, while the Nasdaq was up 0.2 per cent, boosted by gains from semiconductors after Broadcom Corp agreed to acquire NetLogic Microsystems in a $3.7bn deal.
Back in London, chip designer ARM Holdings was among the minority FTSE 100 gainers, up 1.6 per cent on the sector consolidation move.
Man Group was the top FTSE gainer, up five per cent, with traders seeing the hedge fund manager as a likely beneficiary of market volatility.