The FTSE 100 Index lost 1.6%, diving 104.1 points to 6483.3, with the sell-off reflecting disappointing corporate results, including from Asda owner WalMart, and fears that improved economic performance will accelerate the timetable for an end to American stimulus efforts.
In the US, speculation that the Federal Reserve will start to taper its quantitative easing programme next month increased after it emerged that the number of people seeking unemployment benefits dropped to a seasonally adjusted 320,000, the fewest since October 2007.
Yesterday's eurozone growth figure of 0.3% for the second quarter was followed by better-than-expected retail sales data in the UK yesterday.
Sales volumes rose 1.1% in July on a month earlier and were up 3% on July 2012 - the steepest rise for two and a half years - as the heatwave sent sales soaring at supermarkets and department stores. The pound strengthened against most major currencies, and was up to 1.56 dollars and 1.17 euros. But surging retail sales raised fears that a stronger UK economic recovery will result in the Bank of England lifting interest rates from their record 0.5% low much earlier than expected.
The Dax in Frankfurt and the Cac 40 in Paris both lost ground.
Kathleen Brooks, UK research director at Forex.com, said markets are "unwilling to take the world's major central banks at their word".
A number of London's best-performing stocks of recent weeks suffered in the weak session as investors seized the opportunity to take profits, with thin volumes exacerbating falls.
They included airline easyJet, which fell 58p to 1252p, while housebuilder Persimmon was 87p lower at 1097p, down 7.3%.
The best-performing stock on a shortened FTSE 100 Index risers board was Imperial Tobacco as it weathered another big decline in sales volumes by reiterating its guidance for the financial year.
Volumes for the first nine months of the year were down 7%, rather than the 6% forecast in the City, but chief executive Alison Cooper hailed the company's focus on costs and strategy as she said full-year forecasts were unchanged.
The world's fourth-largest tobacco group, which sells brands such as Lambert & Butler and JPS, rose by 2.6% or 55p to 2209p.
Cinema chain Cineworld fell 3.5p to 391p despite reporting a 24% rise in half-year profits to £16.5 million, driven by a 10% improvement in box office revenues.
The biggest risers on the FTSE 100 were Imperial Tobacco, Admiral, 12p stronger to 1279p and Eurasian Natural Resources, up 0.8p to 230.1p. The biggest fallers on the FTSE 100 were Persimmon, TUI Travel, 21p lower to 362.7p, Travis Perkins, 75p weaker to 1553p and ITV, off 7.5p to 156.6p.