Updated 15.00 UK time: The FTSE 100 is down 3.05%, or 154 points, to 4917 as concerns about the Chinese economy weigh heavily on investor minds.
Barclays is leading the downward plunge, down 6.20% and miners are faring particularly badly, with Xstrata down nearly 6% and Rio Tinto down 5.7%.
Expectations of heavy losses in Wall Street have dragged London's leading index below the 5,000 mark for most of the day.
Such fears appear well founded, with the Dow down 2.19% to 9916 shortly after 15.00 UK time. Stocks plunged sharply trading began, mirroring heavy falls in Asia overnight, and reflecting concerns of muted Chinese growth.
London's leading index was down more than 106 points, or 2.1%, at 4,964.95, shortly after 11am.
Investor sentiment has taken a hit ahead of bank repayments due to the European Central Bank (ECB) this week.
According to reports, banks must repay €442bn to the ECB on Thursday, leaving a potential liquidity shortfall in the financial system of over €100bn.
Commodity stocks are posting big losses as oil and copper prices fall.
Rio Tinto shares have tumbled 5.45% to £30.78 while Xstrata stock has dropped to 921.4p, a loss of almost 5%. Lonmin and Vedanta Resources also posted losses.
However US companies are interested in UK assets judging from Emerson's 375p per share or £1bn bid for Chloride this morning. It trumps an agreed 325p offer from ABB by 15%. ABB is considering its position.
The FTSE had earlier fallen below 5,000 as investors reacted to falls for global markets in the US and Asia overnight.
Japan said on Tuesday its unemployment rate had unexpectedly risen and industrial production had fallen in May.
Meanwhile, the New York-based Conference Board revised down its April leading indicator for the Chinese economy from a gain of 1.7% to just 0.3%.
Leading European shares fell sharply in early morning trading following overnight falls in Asian markets.
The main Cac 40 index lost 56.75 points, or 1.7%, to 3,519.70, wiping out all on Monday's gains.
Germany's Dax index is also reporting heavy losses, down 139.22 points, or 2.26%, at 6018.00 points.
In the US, stocks ended on a weak note on Monday after a stronger dollar brought down prices for energy and other basic materials.
The Dow Jones closed more than five points, or 0.1%, down at 10,138.52 after being up for most of the day. A report consumers saved more than they spent last month hurt retailers, with Home Depot dropping 2% to $29.59.
Asian stocks followed the late dip on Wall Street with Japan's Nikkei average slipping 1.3%, erasing earlier gains as exporters fell on a stronger yen. The benchmark is poised for its worst quarter since Lehman Brothers failed in 2008.
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