The FTSE 100 was down 145.66 points at 5090.6 and the FTSE 250 fell back to 8458.84, down 294.17 points, at 12:04 pm.
The London market tracked overnight losses on Wall Street and in the Asian markets - investors sold on concerns about the $700bn US bailout plan, the details of which are still being thrashed out between the executive and the legislative branch in Washington.
"The market is in no mood to wait," said on market source. "There are some raw nerves out there and the faster this plan is put together, the better it is for market confidence."
The latest set of unsecured lending and mortgage data from the British Bankers Association also sullied sentiment this morning.
"This is a really dismal set of mortgage data," said Howard Archer, chief European & UK economist at Global Insight. "The BBA reported that the mortgages approved for house purchases slumped to a record low of just 21,086 in August. This was the lowest since the series started in 1997 and down a massive 64 per cent year-on-year from 58,564 in August 2007, when mortgage lending had already started to slow."
"[This data] graphically highlight[s] that housing market activity continues to be throttled by stretched affordability and tight lending conditions… the current financial sector turmoil is likely to deepen the pressure on housing market activity through further tightening [of] credit conditions and [by] exerting upward pressure on interest rates."
The banking sector was the focus of the selling and HBOS was down 12.15 per cent or 25.4p at 183.6p despite the FSA's ban on the short selling of financial stocks. Bradford & Bingley was down 14.16 per cent or 4p at 24.25p and Lloyds TSB eased back to 253p, down 8 per cent or 22p.
London Scottish Bank, which was the subject of the first short selling disclosure under the new FSA rules, was down 2.54 per cent or 0.15p at 5.75p after Timothy Babich's Fortelus Capital said that, as of last Friday, it had short position in 5.33 per cent of the company's stock.
There was little activity on the upside this morning. Defensive tobacco and pharma stocks were the only notable risers on the FSTE 100 - Imperial Tobacco was up 13p at 1743p, British American Tobacco gained 14p to 1782p and Shire was up 2p at 913.5p.
At the other end of the benchmark index, Man, the London-based hedge-fund group, lost another 12.8 per cent or 55.5p to 378p as traders speculated about the impact the short selling ban might have on the hedge-fund business. Man, which was not included on the FSA's list of securities protected from short selling, was also mentioned as a possible target for bears still keen on shorting financial stocks.
Elsewhere, the heavyweight resource stocks fell back as the oil price gave back recent gains and the Eurasian Natural Resources Corporation was the weakest, down 89p at 597.5p. Anglo American was down 204p at 2123p and Vedanta Resources fell back to 1565p, down 139p.