Markets fell sharply as fears over Greece deepened following its decisive rejection of a package of bailout measures in a referendum over the weekend.

The FTSE 100 Index had initially seen a muted reaction to the vote with a drop of 50 points on Monday amid hopes that progress could still be made in talks.

But at discussions in Brussels today, new Greek finance minister Euclid Tsakalotos failed to deliver any new proposals for a bailout deal, sending London's top-flight 103.5 points lower to 6432.2.

Germany's Dax and France's Cac 40 both slumped by two per cent, while New York's Dow Jones Industrial Average was also in the red.

Sunday's referendum had seen the Greek public reject the kind of austerity measures proposed by international creditors.

A yes vote could have helped unlock much-needed bailout funds for the debt-laden country which now instead appears to be sliding towards an exit from the euro.

The crisis helped the safe-haven US dollar make gains, with the pound dropping two cents against the greenback to just above 1.54.

Sterling was also hit by official figures showing a worse-than-expected 0.6 per cent decline in the manufacturing sector in May, the second monthly fall in a row.

The pound also edged lower against the euro, at just under 1.41.

In equities, BP and Royal Dutch Shell continued to be hit by oil price turbulence, with a barrel of Brent crude remaining below 57 US dollars after a sharp fall in the previous session.

BP, the mainstay of many UK pension funds, fell nearly three per cent, or 11p, to 418.6p. Shell was 39p lower at 1761.5p.

Airlines, which stand to benefit from the oil price drop, were among the shortened list of top-flight risers.

Easyjet rose 14p to 1590p while British Airways owner International Airlines Group climbed by 3.8p to 488p.

High street giant Marks & Spencer was also in the spotlight as it posted a drop in quarterly clothing sales after a colder May impacted demand for its spring and summer collections.

The retailer said its general merchandise like-for-like sales fell 0.4 per cent in the 13 weeks to June 27, but this was much less than the one per cent slide the market was expecting. Shares were initially higher, but later dropped 12p to 535p.

Centrica and SSE were also in sharp focus after the Competition and Markets Authority recommended capping energy prices.

The CMA said British households were overpaying for energy by £1.2 billion a year and failing to switch to get the best deals.

It outlined plans to encourage customers to shop around, but stopped short of recommending a break-up of the energy giants, saying competition in wholesale markets was working well.

British Gas owner Centrica fell nearly three per cent, or 7.6p, to 259.8p, while SSE dropped by 33p to 1541p.

The biggest risers on the FTSE 100 Index were Land Securities, up 20p at 1250p, easyJet up 14p at 1590p, International Airlines Group up 3.8p to 488p and British Land up 6p at 805p.

The biggest fallers were Glencore down 17p at 230.6p, Anglo American down 50.9p at 832.3p, Rolls-Royce down 43p at 759.5p and Weir Group down 84p at 1582p.