The FTSE 100 Index suffered its third day of turmoil closing down more than one per cent - or 69.2 points - as the London market continued to be volatile.
Investors reacted badly to the decision by Qatar-backed investment fund Delta Two to pull the plug on a potential £10.6 billion takeover of supermarket group Sainsbury's.
Shares in the supermarket chain plummeted by 21 per cent yesterday, setting the trend for the whole market.
The FTSE eventually closed at 6461.4.
The resignation of Citigroup chief executive Charles Prince - the second high-profile Wall Street chief ousted in less than a week - also cast a large shadow over proceedings with several banks joining Sainsbury's on the list of heavy fallers.
Nerves were frayed wondering which bank might be the next to disclose substantial losses and a number of financial stocks were hit hard by renewed fears over the fall-out of the credit crunch. Wall Street fell by just over 50 points in the first few hours of trading.
Bill Gross, chief investment officer of Pacific Investment Management, said the markets had "only begun to see the pain" from the sub-prime fall-out.
He claimed that mortgage delinquencies and defaults would rise through 2007 and into 2008, and the Federal Reserve would need to cut interest rates further.
In the UK, analysts at HSBC downgraded Barclays along with Halifax Bank of Scotland as experts fear the sub-prime mortgage losses for banks has not yet been fully priced in after a string of write downs from major investment banks across the Atlantic.
Barclays was down nearly three per cent - although this represented a recovery from the near six per cent losses seen earlier in the session.