The latest flight from risk came as Russia stoked tensions by reportedly assembling 20,000 troops on Ukraine's border.
Sentiment was further eroded by new data showing that Italy had slipped back into recession, taking the FTSE 100 Index 46.3 points lower to 6636.2, while Frankfurt's Dax and Paris's Cac 40 also ended in negative territory.
The slump ended a two-day recovery for markets after Friday's turbulent session when a string of global events, including a debt default in Argentina and banking crisis in Portugal, combined to send investors running for cover. There was also disappointing data from the UK economy as it emerged that manufacturing output rose by a smaller-than-expected 0.3 per cent. Analysts warned the strength of the pound and the weakness of the eurozone economies may be holding back growth in the sector.
The figure softened growing expectations of a Bank of England hike in interest rates from the 0.5 per cent level where they have been held for five years.
The pound came under pressure as a result, with sterling down 0.3 per cent to 1.68 against the US dollar and broadly flat against the euro at 1.26.
Meanwhile in London, medical and drugs stocks linked to takeover deals topped the FTSE 100 fallers' board after it emerged that the US Treasury was reviewing its powers to stop so-called "inversion" moves.
A typical example was drugs firm Pfizer's plan to re-domicile in the UK if it had succeeded in taking over rival AstraZeneca, thereby cutting its tax bill.
Inversions can make such foreign takeovers attractive to US corporations and the shares in their potential prey tempting for investors. But the suggestion that such deals could be tackled by the US Treasury saw medical equipment firm Smith & Nephew, which has repeatedly been the subject of takeover speculation, slip four per cent, or 44p, to 1020p.
Drugs firm Shire, which is in the throes of a takeover by America's AbbVie, also dropped four per cent, or 196p, to 4680p. AstraZeneca was down 155.5p to 4190p.
A shortened risers board included business software group Sage after it named a successor to Guy Berruyer as chief executive.
Stephen Kelly has been the boss of two software companies, including Nasdaq listed Chordiant, and in his role as senior civil servant is leading the government's drive to cut red tape and overhaul IT systems in Whitehall. Shares rose 2.6p to 370.7p.
The biggest risers on the FTSE 100 Index were Fresnillo up 58.5p to 985p, Randgold Resources up 150p to 5155p and Hargreaves Lansdown up 25p to 1033p. The biggest fallers were Smith & Nephew down 44p to 1020p, Shire down 196p to 4680p and AstraZeneca down 155.5p to 4190p.