Blue chip shares slumped in afternoon trading as the row over US President Donald Trump's links with Russia deepened.
The US attorney general appointed former FBI boss Robert Mueller as special counsel to oversee an inquiry into the links between Trump's administration and the Kremlin.
The FTSE 100 Index plunged 80.3 points to 7423.1, as world markets feared the President's FBI controversy will prevent him from delivering his tax and regulatory reforms. The FTSE 250 Index fell 164.3 points to 19609.3.
Germany's Dax and the Cac40 in France were down around 1%, while overnight US and Asian markets also tumbled.
Earlier this week the London market leapt to an all-time high of 7522, buoyed by rises among a broad range of consumer-focused companies.
Calls for a special investigation had mounted since Trump fired the most recent FBI director, James Comey.
CMC Markets chief market analyst Michael Hewson said: "President Trump has enjoyed an almost Teflon-like existence since being in the White House with markets prepared to give him the benefit of the doubt on a number of occasions despite his tendency to stagger from one controversy to another.
"This latest one involving ex FBI head James Comey has sparked concerns that this could be Trump's Watergate moment, with Democrat Congressman Al Green of the Democratic Party calling for his impeachment, for allegedly attempting to influence an ongoing FBI investigation."
Burberry was one of the strongest risers in the top flight, despite posting a 5% dip in pre-tax profits to £394.8m ($439.75m) in the year to the end of March compared to a year ago, due to lower wholesale revenues in the US and the expiry of a Japanese licence.
However, investors were cheered that the fashion retailer had cut costs and looked forward to the July arrival of the retailer's new chief executive Marco Gobbetti, the former boss of French fashion house Céline. Shares lifted more than 2%, or 36p to 1677p.
The biggest afternoon risers in the FTSE 100 Index were Shire (+271.5p to 5003p), Centrica (+5.1p to 198.5p), SSE (+33p to 1501p), Burberry Group (+36p to 1677p), Marks & Spencer (+6.1p to 381.6p).
The biggest afternoon fallers in the FTSE 100 Index were Ashtead (-65p to 1495p), Royal Dutch Shell (-79.5p to 2171p), Antofagasta (-31.5p to 774p), Experian (-54p to 1640p), Mondi (-63p to 1961p).
The biggest afternoon risers in the FTSE 250 Index were Berendsen (+164.5p to 1028p), JRP Group (+7.8p to 136.5p), Euromoney Institutional Investor (+53p to 1172p), TalkTalk (+6.4p to 181p) and Cairn Energy (+7p to 204.7p).
The biggest afternoon fallers in the FTSE 250 Index were Mitchells & Butlers (-13.8p to 244.2p), Bodycote (-38.5p to 750p), Ferrexpo (-8.1p to 160p), Keller Group (-41.5p to 875p) and IMI (-56p to 1199p).