Britain's top share index was down 0.6 percent early on Tuesday, led by banks and energy stocks after U.S. lawmakers rejected a $700 billion banking bailout package, but miners boosted by gold prices lent some support and the overall market was off earlier lows.
By 0759 GMT, the FTSE 100 was down 26.4 points at 4,792.4, well off its low of 4,671.0 — its lowest level since November 2004.
The UK benchmark plunged 5.3 percent on Monday, and has fallen 15 percent this month, on track for its biggest monthly decline since October 1987 when it tumbled 26 percent.
Banks were among the top-weighted fallers, with the FTSE 350 banks index shedding 2.7 percent.
Royal Bank of Scotland, Barclays, HSBC, HBOS, Lloyds TSB and Standard Chartered were initially down between 0.5 and 11.8 percent but then came off their lows.
The Dow Jones industrial average plunged on Monday in its biggest decline ever after the House of Representatives voted down the bailout plan, spooking investors who fear for the future of global markets and the U.S. economy. In Asia, Japan's Nikkei average shed 4.1 percent.
But some analysts were hopeful that the U.S. would eventually push through a bailout package to rescue the financial sector.
"It's certainly my working assumption that there is some sort of agreement reached in the U.S. and based on that I would expect the market to recover quite strongly from yesterday's sell-off," said Darren Winder, equity strategist at Cazenove.
"It's a softish day. Equities are now getting to extreme valuations where fundamentally there is an awful lot of value."
Other financials also fell sharply initially, with Old Mutual, Prudential, Standard Life and Aviva losing 0.9 to 3.8 percent. Hedge fund Man Group sagged 2.1 percent.
Heavyweight energy stocks also came under pressure as crude prices slipped below $95 a barrel. BP, Royal Dutch Shell, Cairn Energy, Tullow Oil and BG Group sagged 1.3 to 4.5 percent.
Miners offered some support on higher gold prices as investors sought safer assets.
BHP Billiton, Rio Tinto, Anglo American, Xstrata, Vedanta Resources, Kazakhmys and Eurasian Natural Resources put on between 0.2 and 5.9 percent.
In the broader market, Tesco advanced 3.4 percent after Britain's biggest retailer met forecasts with a 10.3 percent rise in first-half profit and said like-for-like sales growth at its UK operations accelerated over the summer months.
BSkyB dropped 1.5 percent after Ofcom said the pay-TV firm has too much power in teh supply of premium content such as Premier League soccer matches and could be made to offer it on a wholesale basis to rivals.
The pay-TV firm had lost its appeal to keep hold of its 17.9 percent stake in free-to-air broadcaster ITV. Mid-cap ITV was down 1.8 percent.
Scottish & Southern Energy lost 1.6 percent. The utility said it remained on track to increase annual profits.
