The FTSE 100 Index traded at its worst levels for the day as the market closed, down a massive 143 points, or 2.5%, to 5,563 points, led by a decline among miners.
Xstrata dropped 6.25% to 1,815p as metal prices lost further ground.
Kazakhmys fell 4.82% to 1,006p and Antofagasta declined 5.43% to 1,846p.
BP tumbled 3.37% to 603p, while Shell dropped 3.59% to 1,745p after crude prices fell sharply overnight and continued their descent today on reports of the death of Iraqi militant Abumusab al-Zarqawi.
Cairn Energy also fell 5.73% to 1,925p.
Meanwhile, Cable & Wireless was one of the few risers, gaining 0.47% to 106.50p, on news it is to cut 150 jobs at its Bulldog broadband unit as the firm decides to move its focus to wholesale rather than on residential and small business customers.
In the US, the Dow Jones Industrial Average has tumbled 94.77 points, or 0.9%, to 10,836.13 points, down 7% from a six-year high reached in May, after speculation higher interest rates will snuff out economic growth.
Exxon, the world's biggest publicly traded oil company, has declined 60 cents to $58.22, while Chevron has slipped $1.12 to $56.05.
Prices for copper, aluminum and zinc have declined on speculation of falling global demand, taking Alcoa down $1.07, or 3.6%, to $28.98.
Investors are buying shares such as Procter & Gamble as a safe haven because their earnings are less-reliant on the economic cycle. P&G has added $1.21 to $54.45, lending some support to the Dow.IFAonline
Despite improved risk appetite
FOS award limit increase
Relates to 136 million transaction reports
Ceremony will take place 13 November