Nearly £60bn was wiped off the share values of the UK’s bluechip companies amid fears of a global credit crunch.
The FTSE 100 and fell by more than 4%, its biggest one-day percentage loss for nearly four years.
Its fall of more than 250 points was the fourth biggest points fall ever, larger even that suffered on ‘Black Monday’ in 1987.
The index finished the day at 5,858.9, its lowest close since last September.
The retreat from most forms of financial risk follows anxieties over a worsening crunch in corporate lending markets.
US stock markets also fell, but rallied before the close of trading. By early afternoon in New York, the Dow Jones was down more than 264 points, or 2.05% from Wednesday’s close. However. it rebounded in late trading and close down only 15.69 points, at 12,845.78.