Political uncertainty in France and the Netherlands threatened to derail plans to stabilise the eurozone and triggered a rout on world markets yesterday.
The FTSE-100 Index fell 106.6 points to 5665.6 after Dutch Prime Minister Mark Rutte tendered his government's resignation following the collapse of key budget cut talks.
In France, Nicolas Sarkozy came second in the first round of the presidential election to socialist rival Francois Hollande, who plans to renegotiate a deal to tackle eurozone debt.
The fall of nearly 2% wiped £27.6 billion from the value of London's leading shares index.
Germany's Dax was down more than 3% after industry data showed the biggest fall in the powerhouse economy's manufacturing sector for nearly three years. And the Cac-40 in France was down nearly 3%.
The pound was up against the euro at 1.23 after the single currency was hit by the eurozone fears. But sterling was down against the dollar at 1.61.
The uncertainty in the eurozone rocked the banking sector, with Barclays dropping 4%, or 9p, to 204.6p, Royal Bank of Scotland losing 0.9p to 23.1p and Lloyds Banking Group falling 0.7p to 29.4p.
A survey of China's manufacturing sector revealed the industry was still in decline.
This knocked the mining sector, which relies heavily on demand from China, with Vedanta Resources dropping 6% or 70p at 1167p, while Rio Tinto down 171p at 3376p.
There were only two risers in the top flight – British Sky Broadcasting and Smiths Group.
Vodafone lost earlier gains despite announcing a £1.04bn deal to buy struggling telecoms firm Cable & Wireless Worldwide, which will help it bolster its corporate arm in the face of slow consumer growth. Shares were down 0.1p at 171.4p.
But CWW shot to the top of the FTSE 250 Index. It rose 12% or 3.9p to 35.9p after Vodafone unveiled its 38p a share bid, which marks a 92% premium to the CWW closing price on the day before the talks were unveiled.
Shares in Greene King were 1.5p lower at 517.5p despite revealing higher like-for-like sales in the 13 weeks to April 15.
The pub chain said its managed pubs saw a 4.5% in like-for-like sales, with sales of food up 6.7%.
Transport group Stagecoach saw shares fall 5.5p to 247.6p after it revealed a slowdown in sales growth in recent weeks. The Perth-based company, which runs a rail and bus division, said profits in the coming year will at least hold steady.
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