Leading shares have suffered their biggest one-day fall since 11 July, mainly because of worries about the state of the US economy.
With Wall Street down around 250 points by the time London closed, the FTSE 100 ended 137.6 points lower at 5362.1.
It all started fairly calmly but that all changed once news came in of a 15,000 jump in US benefit claimants to 444,000 last month. A separate survey from ADP showed US private employers had cut 33,000 jobs in August, while a service sector survey - which was fairly positive in some respects - also contained weaker employment numbers. Investors took this badly ahead of tomorrow's non-farm payroll figures.
Elsewhere, the European Central Bank tightened its criteria for lending against riskier investments, which undermined sentiment in the entire banking sector.
Barclays closed 21p lower at 329.25p, Lloyds TSB lost 17.25p to 286.25p and HBOS was down 20.75p at 282.5p.
Bradford & Bingley - whose rights issue was priced at 55p - fell 3.25p to 39.5p.
Among the gainers, food producers were in demand. Unilever closed 91p higher at £15.81 after appointing Nestle's Paul Polman its chief executive, while Cadbury closed 5p higher at 622p as Lehman Brothers raised its target price from 716p to 800p.
