Italy’s political turmoil has sparked a downturn in European stocks and helped knock £25 billion off the value of the UK’s blue chip index.
The FTSE 100 ended the day down 1.2% or 97.64 points at 7,632.64, while its continental peers were also hit by a sea of red with the French CAC 40 and German Dax down 1.2% and 1.5%, respectively.
Milan’s FTSE MIB tumbled 2.6%.
It comes amid concerns about Italy’s future under two Eurosceptic parties that could send the country on the path towards an EU exit, as well as the prospect of fresh elections if a coalition government fails to be formed.
David Madden, a market analyst at CMC Markets UK, said: “Political turmoil in Italy and Spain has rocked investor sentiment in Europe.
“Carlo Cotarelli will act as interim Italian prime minister to steady the ship, but we are likely to see a general election at the back end of this year or in early 2019.”
He noted that the League Party and Five Star Movement are tipped to gain more ground if Italians are forced back to the polls.
“The rise of anti-euro sentiment in Italy is the driving force behind the sell-off,” Mr Madden said.
“The yield on the two-year Italian government bond jumped to its highest level in over 20 years, and Italian stocks are suffering for it.”
He added that Spain is going through its own political upheaval, as its prime minister Mariano Rajoy faces a vote of no confidence on Friday.
In currency markets, the pound was mixed, trading up 0.2% against the euro at 1.147, but down nearly 0.4% versus the US dollar at 1.325.
Brent crude prices slumped nearly 1% to 74.56 US dollars per barrel amid reports that Opec members and other major oil producers could start raising production caps.
In UK stocks, Standard Life Aberdeen fell 9.1p to 350.8p despite confirming that it would return up to £1.75 billion to shareholders following the sale of its European insurance business to Phoenix Group.
As part of the deal, Phoenix will take on the UK mature retail and spread/risk books and the Europe, UK retail and workplace operation, while Standard Life Aberdeen will hold on to the UK retail platforms and financial advice business.
Dixons Carphone was at the bottom of the FTSE 250 as the company warned on profits and revealed plans to close 92 stores.
Dixons Carphone said that full year pre-tax profit is expected to come in at £382 million, down from £501 million in 2017. Next year the figure will fall to £300 million, the firm added.
The company said it was grappling with changing consumer habits that have seen customers hold on to older phones and go “Sim-only” – denting the group’s performance.
Shares fell 48.4p to 185p.
IWG was one of the best performing stocks on the FTSE 250, rising 7.8p to 312.1p on news that the Regus owner has rejected a fifth takeover approach, turning down a cash offer from US investor Prime Opportunities.
IWG was also the subject of a takeover attempt by Brookfield Asset Management and Canadian private equity firm Onex in December, which sent its share price up 30%.
The biggest risers on the FTSE 100 were Fresnillo up 40.5p at 1,338p, Smiths Group up 30p at 1,750p, Evraz up 6.3p at 484.7p, and Randgold Resources up 72p at 5,830p.
The biggest fallers on the FTSE 100 were NMC Health down 182p at 3,630p, Direct Line Insurance Group down 15.9p at 356.7p, Severn Trent down 89p at 1,999p, and Marks and Spencer Group down 12.7p at 298p.