The FTSE 100 slid 2.8 percent early on Monday as the part nationalisation of Bradford & Bingley dealt another blow to a reeling banking sector, ahead of a U.S. lawmaker vote on a $700 billion financial rescue package.
By 0752 GMT the FTSE 100 was down 144.1 points at 4944.3, after losing 2.1 percent on Friday.
Nervousness about the future of the troubled UK banking sector was heightened after the British government said Bradford & Bingley's branch network and deposit business would be sold to Spain's Santander and the remainder of the group nationalised.
Royal Bank of Scotland, Lloyds TSB, Barclays and HBOS fell between 6.6 and 11 percent.
Other financial stocks were also lower with London Stock Exchange down 2.6 and insurers Aviva and Prudential down 1.3 and 2.9 percent respectively.
In the United States, the $700 billion government fund to buy bad debt is set to be voted through later on Monday but this seemed to do little to ease mounting anxiety about the health of the global financial system.
"There's a feeling abroad that the U.S. (rescue package) was a grudging affair, we were talking about this a week ago and we're not that much further on," said Peter Dixon, UK economist at Commerzbank.
"News that part of the Bradford & Bingley is being nationalised is not helping and there's a sense that there's a lot more bad news to come."
ICAP, the world's largest interdealer broker, fell 5.4 percent, in line with other financials, even though it said it expected full-year profits to be ahead of last year.
Miners also took a knock, hit by metals price falls on concern that the global economy may experience a significant slowdown.
Rio Tinto, Anglo American, Xstrata Kazakhmys and Eurasian Natural Resources fell between 3.8 and 8.1 percent.
Energy stocks were pressured as oil extended recent losses, falling over a dollar to below $106 a barrel. BP fell 1.6 percent while Royal Dutch Shell fell 1.9 percent.
Thomas Cook gained 3.7 percent after it said it has withdrawn from discussions with TUI Travel and Lufthansa about a merger of its charter airline with TUIfly and Germanwings.
Cadbury fell 1.3 percent after the Hong Kong government's Centre for Food Safety said it had recalled 11 chocolate products in Hong Kong as a precautionary measure.
