The turmoil in world markets intensified today as fears the eurozone will collapse were fuelled by a rise in borrowing costs for some of its biggest members.
The FTSE 100 Index fell 1% after Spain was forced to pay nearly 7% to borrow 3.56 billion euros (£3 billion) on bond markets - a level widely seen as unsustainable.
Italian and French borrowing costs also rose as investors feared the countries may default on their debt repayments amid fears the eurozone is on the brink of recession.
Taxpayer-backed bank Lloyds was among the biggest fallers in London as sentiment continued to sour in the banking sector.
The Dax in Germany and the Cac-40 in France were also lower while the Dow Jones Industrial Average fell 1.5% overnight after ratings agency Fitch said US banks would suffer heavily if the eurozone debt crisis spread.
Italian borrowing costs have remained above 7%, with new leader Mario Monti expected to unveil his government's anti-crisis strategy in Parliament today. Transport unions called for strikes to protest against the cuts, outlining the tough task faced by his fledgling government.
Chris Beauchamp, market analyst at IG Index, said: "Italian benchmark yields are back in the bailout zone, above 7%, despite the installation of a cabinet of technocrat experts in Rome, while Spanish yields are heading merrily towards the same abyss.
"Even more worrying was the continuing rise in French bond yields, and while these might be nowhere near the danger zone, it reminds everyone that the next eurozone domino after Italy and Spain is France."
When Portugal and Ireland's borrowing costs rose above 7% they were forced to accept bail-outs.
The rise in borrowing costs for Spain and Italy are creating panic because the countries are seen as too big to bail-out and could crash the eurozone.
The weak sentiment hit oil prices, with Brent crude oil down 1% at 109.5 dollars a barrel, while the US currency, which is seen as a safe haven amid the chaos, rose on foreign exchange markets.
Kathleen Brooks, of Forex.com, said: "Expect a lot of volatility in the markets for as long as Spain remains under pressure."
The FTSE 100 Index closed 85.9 points lower at 5423.1, a fall of 1.5%.