Leading shares lost 1.2 percent on Friday as an intensifying credit market crisis threatened to further batter financials, while weak metal prices offset the impact of bid talk to take most mining stocks lower.
The FTSE 100 index ended 77 points lower at 6,304.9 points, its weakest finish in seven weeks, taking its losses for the past five sessions to 3.5 percent. U.S. indexes were sharply lower and stocks in continental Europe also slid.
Banks were the heaviest weighted decliners, taking around 18 points off the index, with HSBC falling 1.4 percent and Royal Bank of Scotland 3 percent.
Barclays at one stage fell 9 percent and its stock was briefly suspended as talk swirled of a $10 billion write-down due to losses linked to the credit market. The bank denied it was about to announce a write-down or lose its top management, and its stock ended 2.4 percent lower.
Insurer Friends Provident tumbled 7.2 percent on a price target cut from UBS and fresh worries over its future strategy after its merger with rival Resolution fell through.
Analysts said that there was too much weighing on the FTSE to allow much of a recovery any time soon.
"Investors are not giving anybody the benefit of the doubt here as far as the banks go -- people are concerned that there's more in the pipeline, and know that the risk attached to the earnings outlook has increased significantly," said Mike Lenhoff, chief strategist at Brewin Dolphin.
"The oil price and strong sterling are not helping," he said, adding that cheaper valuations and likely interest rate cuts could prove mitigating factors in coming weeks.
Sterling hit a 26-year high against the dollar at $2.1161 and oil hovered around $96 a barrel.
Hopes of a higher bid boosted Rio Tinto by 6.2 percent after it said on Thursday it had rejected an approach from BHP Billiton, but other miners fell tracking copper futures.
Vedanta slumped 7.3 percent, Antofagasta lost 4.9 percent and Anglo American ended 4.4 percent lower.
The FTSE has gained around 1.4 percent so far this year, recovering from a 14-percent fall in one month from mid-July as a crisis in credit markets stemming from defaults in U.S. subprime mortgages threatened to hurt the wider U.S. economy.
But the gains pale in comparison with a near 11 percent increase at this time last year, and analysts said any claw back towards the year's highs was unlikely because even the banks themselves appeared unclear about the extent of their problems.
"There is still a great deal of uncertainty around, the financials in particular," said Richard Hunter, head of UK equities at Hargreaves Lansdown. "The market is definitely pricing in the worst scenario at the moment."
Oil continued to climb, rising 52 cents a barrel to stay above $96, but FTSE heavyweights BP and Shell lost 2.4 percent and 1.5 percent. Analysts say a higher oil price could worsen upward trends on taxes and production costs.
Across the Atlantic, lender Wachovia Corp reported a $1.1 billion loss on subprime mortgage-related debt in October, while Capital One Financial Corp said more customers were missing payments.
Stocks were not helped by a weak reading of consumer sentiment on the Reuters/University of Michigan Surveys.
On the upside, ICAP, the world's biggest inter-dealer broker, rose 4.8 percent, as traders cited defensive switching in the financials sector and vague bid speculation. ( Reuters )