The FTSE 100 closed down 117.1 points at 5,118.7 , below the 5,113.5 level at which the market began the year, as the Dow Jones Industrials' half-hearted recovery on Wall Street ran out of steam and US shares resumed their slide .
Salomon Smith Barney, the Wall Street brokerage, recommended that clients cut their holdings in stock and move into cash as the Dow slipped to 7,675.55, down 105.82 on the day. European bourses were also hit again, with banks in the firing line as concerns about the impact of the Russian crisis on profits continued to weigh on investors' minds.
The pound also retreated as the latest UK purchasing managers survey showed service sector activity slowing markedly in August. The activity index was down from 55.9 to 54.3, its lowest level since the survey started in July 1996. Sterling fell by nearly three pfennigs to DM2.895.
The Bank of England has been concerned at the strong growth in services and the upward pressure on wages, particularly for computing staff. However, economists said that a cut in British interest rates may be further away than the markets now expect.
The Bank of England's Monetary Policy Committee meets next week against a background of mounting concern about the impact of the Russian and Asian crises and the stock market collapse on economic activity.
David Coleman, economist at CIBC Wood Gundy in London, said: "More modest growth in services will be welcomed by the Bank of England. But not so welcome, we feel, that it will countenance rate cuts this year."
The survey covers 30 per cent of the UK economy.
Kevin Darlington at ABN-Amro said: "Although the economy continues to slow, there is little evidence that the labour market is adjusting quickly enough to ameliorate the pay pressures that remain the Monetary Policy Committee's primary concern."
Hopes of a resolution to Russia's financial crisis seemed as remote as ever yesterday, amid reports of Western companies flying supplies of dollars in by the suitcase-load. The rouble plunged yet again, slumping another 24 per cent to close at 13.46 to the dollar in the first official trading in over a week.
Russians mobbed banks following orders from the central bank to six of Russia's largest private sector banks to freeze deposits for six months. Ordinary savers are to be given the option of transferring their accounts to Sberbank, the Russian state savings bank. Dollar savings will have to be changed into roubles at Tuesday's rate of 9.33 to the dollar.