Britain's leading share index tumbled 3.4% in early trade on Monday, led by bank stocks after U.S. investment bank Lehman Brothers failed to find a rescuer and filed for bankruptcy protection.
By 0831 GMT, the FTSE 100 fell 181.2 points to 5,235.5, wiping out nearly all of the gain made last week, and on track for its worst day since May 20. There were no gainers on the UK benchmark index.
Worries about the financial crisis deepened after attempts on Sunday to find a rescuer for Lehman failed and troubled insurer American International Group asked the Fed for a lifeline, according to news reports.
The U.S. Federal Reserve also said for the first time it would accept stocks in exchange for cash loans and 10 of the world's top banks agreed to set up a $70 billion emergency fund, with any one of them able to tap up to a third of that.
But Bank of America agreed to buy Merrill Lynch in an all-stock deal worth $50 billion, seeking a bargain as the world's largest retail brokerage sought refuge from fears it could be the next victim.
"Lehman was one of the biggest names in banking, it's been around over 150 years. It survived the Wall Street crash, it survived the Great Depression but it hasn't survived the credit crunch," said Henk Potts, investment manager at Barclays Stockbrokers.
He added: "It's clearly serious but it's not systemic and it's not as much of a shock as some said it would be, so markets are down, but it's not meltdown."
Barclays,, Lloyds TSB and Royal Bank of Scotland all lost between 5.2 and 8.6%.
The biggest loser was HBOS which fell 13% to 245 pence. It was more than 730 pence at the start of the year.
Friends Provident was down 9.1% while Prudential lost 6.6% and the London Stock Exchange shed 4.6%.
HURRICANE IKE
Energy producers fell as oil tumbled to a six-month low on early signs that Hurricane Ike may have spared key Gulf Coast infrastructure, taking 23 points off the FTSE 100.
BP fell 1.4%, Royal Dutch Shell fell 1.8%, while BG Group lost 2.8%.
In the UK, Sainsbury fell 3.8% after the Financial Times quoted Justin King, chief executive of Britain's third-biggest supermarket chain, as saying consumer sentiment was worse than it had ever been going into Christmas.
Enterprise Inns, already slated to fall out of the FTSE 100, lost 5.3%.
The Daily Telegraph cited the British Beer and Pub Association as saying pub closures were running at 36 a week and beer sales in pubs had dropped to their lowest level since the 1930s depression.
British Energy shed 0.3% after the Sunday Express newspaper reported that French power giant EDF was preparing to make a sweetened offer for the UK nuclear power firm as early as this week.
