Top flight shares fell sharply in afternoon trading triggered by declines in bank and housing stocks.
Shares in Deutsche Bank fell to more than 20-year lows after a weekend report said that German Chancellor Angela Merkel had ruled out handing the troubled lender state aid.
Germany's Focus magazine also added that Merkel would not get involved in the bank's dispute with the US over a $14bn (£11bn) bill regarding the sale of mortgage products.
CMC Markets chief market analyst Michael Hewson said: "Since its peaks last October Deutsche Bank's share price has fallen more than 60% reflecting increasing investor disquiet about its ability to deal with its problems at a time of negative rates, shrinking profitability, no dividend and the prospect of tighter capital rules."
The FTSE 100 index slumped 72.6 points to 6,836.8, as the news sent fragile banking stocks lower across Europe. The FTSE 250 fell 163.2 to 17,759.8.
Lloyds Banking Group fell 1.9p to 54.1p, Barclays was 3.5p lower at 167.9p and Royal Bank of Scotland slipped 4p to 178.6p.
Housebuilders also fell after the number of people taking out mortgages slide to its lowest level for 19 months in August, according to Britain's High Street banks.
A total of 36,997 homeowners had their mortgages approved last month, the British Bankers' Association said. This is the lowest figure since January 2015, and a 21% drop on August 2015.
Taylor Wimpey fell 5.8p to 149.7p, Persimmon dropped 64p to 1,774p and Barratt Developments was 16.6p lower at 480.6p.
In afternoon trading the biggest risers in the FTSE 100 Index were National Grid (+7p to 1,081.5p), Burberry Group (+9p to 1,410p), Informa (+4p to 715p), Micro Focus (+9p to 2,133p) and SSE (+6p to 1,540p).
The biggest fallers in the FTSE 100 Index were InterContinental Hotels Group (-136p to 3,149p), Taylor Wimpey (-5.8p to 149.7p), Persimmon (-64p to 1,774p), Barratt Developments (-16.6p to 480.6p) and Lloyds Banking Group (-1.9p to 54.1p).
In afternoon trading the biggest risers in the FTSE 250 Index were Vectura Group (+3.7p to 143.2p), Morgan (+4.7p to287.1p), UDG Healthcare (+9.5p to 635.5p), NMC Health (+21p to 1,418p) and Hochschild Mining (+4.3p to291.1p).
The biggest fallers in the FTSE 250 Index were Sports Direct (-14.4p to 288.4p), Thomas Cook (-3.3p to 69.8p), Redrow (-15p to 393.3p), Crest Nicholson (-16.6p to 446.6p) and Fidessa Group (-84p to 2372p).