The FTSE’s tumble was mirrored across Europe, as markets in France, Germany, Italy and Spain all recorded heavy falls.
On Wall Street, the panic drove the Dow Jones Industrial Average down through the 10,000 level for the first time in four years.The mild euphoria that greeted the passage of the $700bn bail-out of Wall Street on Friday evaporated as traders digested the more bad news from Europe.
The Dow Jones Industrial Average fell as much as 800 points during the session, slipping below the key psychological level of 10,000 for the first time since 2004.
Just after the closing bell, the blue-chip index was down 340.49 points (3.30 percent) at 9,984.89.
A statement by Alistair Darling, the Chancellor, to Parliament failed to calm nerves with the stock market taking a further dive as he spoke.
The Chancellor refused to outline firm plans to deal with the crisis – however, he confirmed the Government was working on a radical scheme which could be implemented in the coming weeks.
European leaders issued an unprecedented joint statement pledging to do whatever is necessary to help struggling financial markets.
An increasing number of Governments across Europe are offering to guarantee the deposits of both households and companies as fears that further banks will fall escalate. Those fears prompted more panic selling of shares.
Mr Darling acknowledged that financial disruption had "intensified" over recent weeks and spread to all parts of the world.
The Government had made available more than £100 billion of long-term lending and was willing to make further resources available as necessary.
"Our aim is to reduce uncertainty and improve confidence in financial markets," he said.
The "process of change" would take time to work through and would require action not just at national level but internationally too.
"It would be irresponsible to speculate on the specifics of future responses," he said. "Providing a running commentary could add to uncertainty in already febrile market conditions.
"But all practical options must remain open to us."
He added: "These are exceptional times and I’m in no doubt as to the size of the task facing us, and governments across the world, in bringing order to the financial system.