Brexit fears sent the FTSE 100 index of the 100 biggest UK companies plummeting below 6000 on Tuesday, breaching lows not seen since February.
The pound continued its shaky descent against the dollar on Tuesday as fresh polls showed that momentum is continuing for a vote to Leave the EU in the upcoming referendum.
European stocks slumped to their lowest levels since February.
The UK's FTSE 100, the French CAC and the German DAX indexes were all down on Monday's close.
The FTSE 100 lost 1.28 per cent of its value to trade at 5,967.68 on Tuesday morning, with banks and building firms leading the sell-off.
The pound swung following the results of a Brexit poll conducted by ICM.
It showed that support for Brexit had grown to 53 per cent and that the proportion backing remain had shrunk to 47 per cent.
Early on Tuesday it slipped 0.5 per cent lower than the previous day's close to trade at $1.4142, near Monday lows of $1.4117, its lowest level in two months.
Against the euro, the pound was down around half a per cent to €1.2551.
“Brexit continues to dominate the news and play havoc with the volatility of the pound, with numerous polls this weekend suggesting that the Leave campaign has taken a lead," said Paresh Davdra, CEO and co-founder of RationalFX.
Fears for Sterling and stocks were compounded on Tuesday when The Sun, the UK's most read daily newspaper, pledged its support for the Leave campaign.
Traders watched for the release of UK inflation data, which showed that the cost of living in the UK remained static at 0.3 per cent.
This is well below the 2 per cent threshold the Bank of England has set before it looks at whether to raise interest rates.
The data will be used by the Monetary Policy Committee to decide whether to raise rates at its meeting on Thursday.
Investors will be watching the Bank of England as well as central banks in the US and Japan as they make announcements about interest rates this week.
The Bank of England has said it will combat market jitters, which have already pushed one-month Sterling volatility to 28 per cent, with a massive cash injection of billions of pounds on Tuesday.
The money, called a special liquidity auction, has been planned to give financial institutions better access to life-saving liquidity around the referendum, to stop financial services from seizing up.
Connor Campbell, analyst at SpreadEx, said that Leave campaigners had started to dominate the conversation at a key time.
"Most damning is the fact that The Sun this morning came out in favour of a Brexit with a flashy and trashy editorial on the reason why Britain should quit the EU.
"The Brexiters have begun to dominate the conversation at the key time, and as shown by the market reaction there is a genuine fear that Europe is on a collision course with history," he said.
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