President Donald Trump put the markets in a gloomy mood on Friday as he slapped tariffs on all Mexican imports, in a bid to put pressure on the country over immigration.
Oil prices fell at one point to a three-month low while London’s blue-chip index was in the red.
A barrel of Brent Crude oil was trading at 63.64 US dollars, down 4.46% on the previous day.
The FTSE 100 dropped by 56.9 points, or 0.79%, to 7,161.26.
European markets were also down, with the German Dax 1.47% lower and the French Cac dipping 0.87%.
Writing on Twitter, Mr Trump said Mexico had “taken advantage of the United States for decades”.
He claimed companies which make products in Mexico would move back to the US to avoid the tariffs.
Fiona Cincotta, senior market analyst at City Index, said investors were abandoning riskier assets in the face of economic upheaval.
“Risk has been swiftly swiped off the table as the latest developments send fear through the financial markets; markets which are already jittery over the strength of global growth,” she said.
She added: “The markets are finally waking up and smelling the bacon – Trump’s trade war is spiralling out of control. There is a level of unpredictability which the markets strongly dislike. With each new threat the possibility of a quick resolution drifts further away.”
The pound was relatively unmoved, inching up 0.13% on the dollar to 1.263 and dropping 0.06% on the euro to 1.132.
Connor Campbell, financial analyst at Spreadex, said: “Next week may see the start of a new month, but considering it begins with Theresa May stepping down as Tory head, leading into the circus of the Tory leadership battle, there doesn’t appear to be any silver lining on the horizon for sterling.”
In company news, Legal & General said it will no longer offer policies to households after bosses sold its home insurance business to German rival Allianz in a deal worth £242 million.
Shares were down 3.4p to 256.6p.
Rank Group, the owner of Mecca Bingo, confirmed it was in advanced talks to buy rival Stride Gaming.
Its shares rose by 6.4p to 152.2p, while Stride’s soared 30.5p to 148p.
Wizz Air will have more airline seats available to passengers travelling from Luton Airport this summer than any other airline, the company has said.
The announcement comes as the Hungary-based budget airline saw passenger numbers jump 16.7% in the year to March 31.
Shares slumped 74p to 3,134p.
Car dealership group Lookers hailed “positive” trading in the three months to March, on the back of a buoyant used car market.
Shares were up 0.1p to 85.9p.
The biggest risers on the FTSE 100 were Fresnillo up 22.8p to 768p, SSE up 29.5p to 1,078.5p, National Grid up 14.8p to 792.8p and BAE Systems up 8.3p to 452.4p.
The biggest fallers on the FTSE 100 were NMC Health down 150p to 2,253p, Hikma Pharmaceuticals down 54.5p to 1,580p, Ashtead Group down 48p to 1,865p and British American Tobacco down 69.5p to 2,760p.