Shares in London tumbled after more dire news on the US economy, where retail sales fell for a record six months in a row.
London's FTSE 100 Index - already hit by falling bank stocks - sank further following the US figures to close nearly 5 per cent down at 4180.6 at 4pm. Meanwhile the Nasdaq nearly 3 per cent to 1500.8.
The 2.7 per cent US decline reported by the Commerce Department was far worse than expected as consumers flagged in the face of a deepening recession - sparking fresh fears over the state of the world's largest economy.
The grim data comes days after the British Retail Consortium said UK firms suffered their worst December on record.
Stripping out petrol and car sales, December's US retail sales fell 1.5 per cent - the worst performance since September 2001 in the wake of the US terror attacks.
November's US retail figures were also revised lower to a 2.1 per cent decline.
ING Bank's Rob Carnell said: "These figures all but guarantee a substantial further decline in US GDP in the fourth quarter.
"With the November to December period accounting for one of the most important sales periods for many retailers, these figures make grim reading."
Just a handful of FTSE 100 stocks were in positive territory following the data, as Wall Street braced itself for a lower opening.
The slump in retail figures on both sides of the Atlantic comes despite deep interest cuts from the Bank of England and the US Federal Reserve.
The Fed cut rates in December to between 0 per cent and 0.25 per cent, while UK borrowing costs currently stand at 1.5 per cent - the lowest since the Bank of England was founded in 1694.
Manoj Ladwa, derivatives broker at ETX Capital, said: "Rate cut after rate cut has clearly had little effect on consumers and it's difficult to see any relief for retailers at the moment."
Shares were also hit today by worries that UK banks could be forced to turn to the Government for more capital to cope with rising bad debts in a recession.
Elsewhere in the sector, Germany's biggest bank, Deutsche Bank added to the negative sentiment with an estimated fourth-quarter loss of 6.4 billion US dollars (£4.4 billion).
And Citigroup - once the world's largest bank but recently bailed out by the US Government - said it would hand control of its brokerage, Smith Barney, to Morgan Stanley - receiving around 2.7 billion US dollars (£1.86 billion) in much-needed cash.Reuse content