Almost £44bn was wiped off London's biggest companies after markets were spooked by fears over the financial health of Dubai and technical glitches hit the London Stock Exchange.
The FTSE 100 tumbled more than 3% to 5194.1 in its biggest one-day percentage fall since the market plunged in March.
Trading was also down for more than three hours during the middle of yesterday's session - adding to the nerves with stocks already on the back foot due to concerns over the Middle East hub.
Investors were stunned by the debt problems at Dubai World, a government investment company, and the news sent shockwaves through global stock markets.
The business - thought to have debts totalling about $60bn (£36.4bn) has asked creditors if it can postpone its forthcoming payments for six months until May, stoking fears of a potential default and denting the Emirates' previously glowing reputation.
Dubai had been expanding rapidly on a wave of cheap credit until the global downturn hit home. Now after six years of unparalleled growth Dubai's economic model, based on foreign capital and massive construction projects, has been called into question. Concerns over potential bad debt exposure sent shares in leading banks tumbling.
Royal Bank of Scotland, which owns Ulster Bank, and Barclays both fell almost 8% and HSBC was down nearly 5%. Lloyds Banking Group was almost 6% lower despite approval for its record £13.5bn rights issue.
IG Index's head of market analysis David Jones said: "It does seem like an over-reaction but it could be an ugly end to the week.
"This year everyone seems to have forgotten about the credit crunch but today does show there could be more bad news to come."
US markets were closed for Thanksgiving holidays but France's CAC 40 and Germany's Dax both nursed falls of more than 3%.
Mr Jones said the failure of the trading system for almost four hours was likely to have a "psychological effect" on markets and make nervous investors more likely to head for the exit.
The hitch affected more than 2,800 companies whose shares are traded on the LSE.