The FTSE-100 Index fell for the fifth straight session, closing 44.2 points lower at 6388.6, as the bailout ultimatum spooked European investors.
Fears the Cyprus woes could spark a new phase in the eurozone crisis also sent France's Cac 40 down 1.4% and the Dax in Germany nearly 1% lower.
With US economic figures also disappointing Wall Street, the Dow Jones Industrial Average fell in early trade following worse-than-expected house sales data and an increase in unemployment benefits.
The euro was badly affected by the Cyprus bankruptcy fears, with the pound up by 0.7% at 1.174. Sterling was also higher at 1.52 US dollars.
This reflected a much-needed boost to economic confidence in the UK after a better-than-expected public sector borrowing figure of £2.8 billion for February and a 2.1% jump in retail sales for the same month.
Shares in fashion chain Next were at the top of a shortened risers board after it posted a 9% rise in full-year profits to £622 million.
The progress came despite its admission that recent trading had been quiet.
Analysts are well used to the company's cautious updates and they looked beyond the uncertainty to power shares up by 167p to 4314p – a gain of 4%.
Rivals fared less well, with Marks & Spencer down 2.4p to 390p and Sainsbury's off 6.7p to 367.9p.
There was also a fall of 3% for Ted Baker in the FTSE-250 Index, despite the fashion chain reporting a 19% rise in full-year profits to £28.9m.
The share price fall of 34p to 1320p offset some of the progress seen over the past year, with shares still up 19% in the year to date.
Other fallers included BT Group, which was down 6.4p at 266.3p, and Burberry with a decline of 38p to 1387p.
North West water supplier United Utilities was also near the top of the FTSE-100 risers board after it said it continued to trade in line with expectations.
Shares were 13.5p higher at 709p, up 2%.
The biggest FTSE-100 risers were Next up 167p to 4314p, AstraZeneca ahead 93p to 3133p, Randgold Resources 140p higher at 5635p and United Utilities up 13.5p to 709p.
The biggest fallers were Eurasian Natural Resources down 12.6p to 294.3p, Arm off 28p to 878.5p, Smiths 36p lower at 1284p and Experian down 31p at 1130p.
