Blue-chip stocks were deep in the red today after talks broke down in Washington over America's planned 700 billion US dollar (£381bn) bank bail-out.
News that the negotiations had faltered spooked investors, who had hoped yesterday that a deal was close to being struck.
London's FTSE 100 Index plummeted more than 90 points into the red at one stage in early trading - a fall of 1.8 per cent.
Talks are due to resume today among Congressional leaders in the US, but there are mounting fears that if the plan is not passed it will throw global stock markets and the US economy back into turmoil.
President George Bush warned earlier this week that the plan represented the best chance the US had of avoiding a severe recession or even a depression.
In London today, banks and insurance firms were under pressure, giving up strong gains seen in yesterday's rally.
Lloyds TSB - soon to take over ailing rival HBOS - was the leading faller in the sector, down 4 per cent, with NatWest parent Royal Bank of Scotland down 3 per cent.
Stocks had soared yesterday on signs that the bare bones of the bank rescue package had been approved, which would enable the US Government to use taxpayers money to buy the "toxic" bad debts held on bank balance sheets.
The Footsie closed up more than 100 points last night, mirroring a similar rise on Wall Street's Dow Jones Industrial Average.
But a stalemate in Congress has put the deal back, with concerns that the plan would be too costly for taxpayers and was an unacceptable intrusion into private business.
It is also thought that an alternative was being discussed that would put less focus on a Government takeover of failing institutions' sour assets.
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