Bank shares tumbled by midday on Friday, pulling down Britain's top share index down 3.9 percent after HBOS reported a sharp rise in bad debts, while commodity stocks slid following the collapse of a deal to bail out automakers.
By 1212 GMT the FTSE 100 was down 161.57 points at 4,227.12. The UK benchmark is down more than 34 percent for the year on fears of a long and painful global recession.
Embattled banks were on the ropes again after HBOS said bad debts and other charges so far this year jumped 66 percent in the last two months alone, to 8 billion pounds ($11.9 billion).
HBOS slumped by 21 percent, Lloyds TSB tumbled 18.7 percent, Royal Bank of Scotland slid 17 percent, while Barclays, HSBC and Standard Chartered fell between 4.2 and 12.7 percent.
Analysts said the poor news coming out on both sides of the Atlantic is cancelling out the beneficial effects from measures to boost the economy.
"No matter how low interest rates go, or how much stimulus the government delivers, it's clear that parts of the economy are suffering badly, and that is going to impact on sentiment and cause investors to sell shares," said Henk Potts, equities strategist at Barclays Stockbrokers.
The Bank of England slashed interest rates by 100 basis points to 2 percent, their lowest since 1951, just a month after a 150 basis point cut, while the government announced tax cuts in a pre-budget report last month.
"TERRIBLE" TIMES
Emphasising the torrid time banks are enduring, the chief executive of JPMorgan Chase & Co said the U.S. bank has had a "terrible" November and December.
Adding to the gloom, Bank of America said it plans to eliminate 30,000 to 35,000 jobs over three years, as the economic slowdown dampens its business activity.
Senate negotiators failed late on Thursday to reach a compromise deal to bail out the embattled U.S. automakers, effectively killing any chance of congressional action this year.
The news sent prices of crude oil and metals lower, and weighed heavily on commodity stocks. BP, Royal Dutch Shell, BG Group and Tullow Oil shed between 2.1 and 4 percent.
Miners BHP Billiton, Rio Tinto, Xstrata, Vedanta Resources, Anglo American, Antofagasta and Kazakhmys fell between 3.9 and 5.9 percent.
"The U.S. economy like the other developed economies is going to contract in 2009 and that makes the first half of 2009 quite problematic for equity markets," said Darren Winder, equity strategist at Cazenove.
"But in the second half of the year we should see signs of more progress. Sentiment is very negative at the moment and there is nothing in the macro level going to shift those sentiments any time soon."
With the grim economic news and fears of a weak Christmas sales, retailers also came under severe pressure. Marks & Spencer dropped 3.1 percent, fashion retailer Next lost 2.3 percent and home improvement retailer Kingfisher fell 1.6 percent.
Supermarkets Sainsbury and Morrison fell 2.3 and 1.3 percent respectively.
Drugmaker Shire was one of a handful stocks in positive territory, gaining 2.3 percent as investors sought safety in stocks perceived as defensive.
