A summit of EU leaders failed to inspire confidence among investors today as European markets suffered further heavy losses amid ongoing fears for the eurozone.
The meeting of 27 EU countries in Brussels tonight is due to focus on Greece's debt crisis and how to get Europe growing again in the face of austerity measures.
But after adding nearly 2 per cent yesterday amid hopes the meeting might deliver a plan to tackle the crisis, the FTSE 100 Index fell by more than 2 per cent as scepticism kicked in.
The persistent fears hit markets across the world, with the Dax in Germany and France's Cac-40 sliding more than 2 per cent, while Wall Street's Dow Jones Industrial Average lost 1 per cent.
Investors had earlier been cheered at the prospect of eurobonds being created as a new form of borrowing for European nations, an idea backed by new French president Francois Hollande.
But the proposal is not supported by influential Germany, which believes eurobonds would not work given that individual member states conduct their own fiscal policies.
Colin Cieszynski, analyst at CMC Markets, said: "Given past disappointments, nobody appears to be putting much faith in European leaders coming to a decisive agreement on anything at this evening's dinner meeting, except maybe the menu."
Meanwhile, reports said that former Greek prime minister Lucas Papademos admitted the government may be making preparations for leaving the euro.
Outside the eurozone, fears over Asian powerhouse China came to the fore when the World Bank cut its economic growth forecast for this year.
The heavily weighted mining sector suffered severe losses amid increased eurozone uncertainty and Chinese fears with Vedanta Resources shedding 9 per cent, Kazakhmys falling 8 per cent and Fresnillo dropping 5 per cent.
Financial stocks came under pressure as well, with investment manager Man Group sliding 6 per cent, while banks Royal Bank of Scotland and Barclays lost 5 per cent and 4 per cent a piece.
The euro fell against most major currencies including the pound and US dollar, while the price of crude oil also tumbled in line with equity markets.
The FTSE 100 Index closed 2.5 per cent lower, off 136.9 points at 5266.4.