Chancellor George Osborne's efforts to calm the markets over Brexit proved fruitless as more than £40 billion was wiped off the value of Britain's biggest companies.
The FTSE 100 Index plunged back below the 6,000 mark, slipping 2.6% to 5,982.2, despite Mr Osborne offering his assurances that the UK is "about as strong as it could be to confront the challenge our country now faces".
On the currency markets, sterling plunged to a fresh 31-year low of 1.3151 US dollars, before rallying back to a 3.4% fall to 1.321 US dollars. Yields on 10-year government bonds also slid below 1% for the first time.
Heavyweight financial stocks, housebuilders and travel firms bore the brunt of the sell-off on the London market, with low-cost carrier easyJet sitting at the top of the biggest fallers after warning over profits.
Shares in easyJet were down 22% after the firm said it will take a £28 million hit following two months of turbulence and warned that Brexit would have a negative impact on the airline.
It flagged strikes in France in May and June and severe weather and congestion issues at Gatwick leading to more than a thousand cancellations, with the EgyptAir tragedy also denting demand.
Royal Bank of Scotland briefly plunged to its lowest level since 2009, before finishing more than 15% down at 174.3p.
RBS, which is 73% owned by the taxpayer, and Barclays saw their shares suspended for five minutes as automatic circuit breakers sprung into action when they dropped more than 8%.
Shares in Barclays finished 17% lower at 26.7p.
Housebuilders were also the victim of a sharp sell-off, with Barratt Developments falling 19% and Charles Church-owner Persimmon slipping 13%.
Britain's vote to leave the European Union continued to wreak havoc on global markets, with Germany's Dax plummeting 3% and the Cac 40 in France plunging 2.9%.
Across the Atlantic, the Dow Jones Industrial Average was trading 1.4% lower.
Away from the top tier, the FTSE 250 - seen as a better barometer of UK business than the FTSE 100 - slumped nearly 7% to 14,967.86.
Meanwhile, shares in Foxtons crashed 22% after the estate agent issued a Brexit profit warning.
The estate agency, which left the FTSE 250 in December, took a tumble after it said the upturn it had expected in the second half of the year is "now unlikely to materialise", adding that annual earnings will be "significantly lower" than in 2015.
Chief executive Nic Budden said: "Whilst we had a strong start to the year, we said in our first quarter update that we expected the first half to be challenging ahead of the EU referendum.
"Since then recent sales volumes have been slow as uncertainty and higher stamp duty has led many buyers and sellers to sit on their hands. The result of the referendum has increased uncertainty and is likely to mean that these trends continue for at least the remainder of the year."