George Osborne today conceded that Britain's economic recovery would be "longer and harder" than hoped amid renewed turmoil on global markets.
The Chancellor said that, although the coalition's efforts to tackle the deficit had made the country a "safe haven" for investors, UK plc was not "immune" to the international "storm".
As the FTSE dropped below the psychologically-important 5,000 mark again, he warned that the world faced its most dangerous moment since the credit crunch hit in 2008.
"History teaches us that recovery from this sort of debt-driven balance sheet recession was always going to be choppy and difficult. We warned that that would be the case," Mr Osborne told the Commons.
"The whole world now realises that the huge overhang of debt means that the recovery will take longer and be harder than had been hoped.
"Markets are waking up to this fact and that is what makes this the most dangerous time for the global economy since 2008.
"I think we should be realistic about that. I think we should set our expectations accordingly."
Shares have been plummeting around the globe for weeks amid fears over the level of debt in major western economies.
Spooked investors have been acting on speculation that France could be the latest country to have its credit rating downgraded - after the US was demoted from triple-A to AA+ last week.
Bank stocks have been particularly hard hit because they would be most vulnerable to a potential default, and the level of their exposure is unclear.
Bank of England Governor Sir Mervyn King gave a gloomy assessment of the impact on the UK yesterday, lowering his growth forecast and raising fears of 5% inflation.
In a statement to MPs after they were recalled from their summer break, Mr Osborne said that while the FTSE had slumped, the market for government bonds was still buoyant thanks to tough deficit reduction measures.
He stressed that Britain was still expected to grow rather than slip back into recession.
But Mr Osborne added: "Instability across the world and in our main export markets mean that in common with many other countries expectations for this year's growth have fallen.
"That is what our response must be. First we must continue to get our own house in order."
Mr Osborne said the Government, the Bank of England and the Financial Services Authority (FSA) were satisfied UK banks were well capitalised and in a position to cope with the "current market turbulence".
"We have in place well developed and well rehearsed contingency plans," he said. "We must also continue to implement the fiscal consolidation plans that have brought stability to our bond markets.
"I believe that the events around the world completely vindicate the decision of the coalition Government from the day it took office to get ahead of the curve and deal with this country's record deficit."