The FTSE 100 was more than 2% lower in mid-morning trade as European debt worries and worse than hoped for Japanese and Chinese data added to fears about the prospects for the global economy.
The main UK index was down 106 points, or 2.08%, at 4965 - having fallen as low as 4957.31 in early trade.
Mixed lending data from the Bank of England and a rise in the European economic sentiment index provided a brief respite but shares soon headed lower again as US futures suggest the DJIA is set to open 100 points lower.
Mortgage approvals ticked lower in May to 49,815 from 49,828 in April and there was another drop in lending to non-financial companies, according to the Bank of England.
Howard Archer, chief European & UK Economist at IHS Global Insight, said the fall in lending to businesses reflects low demand as well as a reluctance to lend.
'The Bank of England data do little to alleviate concerns that ongoing tight credit conditions remain a serious obstacle to significant, sustainable recovery,' he said.
The dollar was advancing as investor risk aversion took hold ahead of more European government bond auctions this week and amid rising fear of deflation across many Western economies.
Joshua Raymond, market strategist at City Index, said: 'Debt issues are clearly continuing to weigh on the market and until investors see austerity measures succeeding; debt is likely to play a strong hand in market behaviour for some time.'
The euro was 0.26% lower against the dollar at $1.2230. The pound was one cent, or 0.38% lower at $1.5038 having hit its highest level since September last year yesterday.
In another sign that investors are worried about the pace of economic growth and the policy tools still available to lenders, the yield on 10-year US government bonds dropped to its lowest level since the spring of 2009 at 2.9076%
In Asia, weaker than expected data in Japan and more worryingly China dragged markets lower.
The Shanghai Composite index was lower for a fifth consecutive day and back to levels not seen since April 2009.
On the UK corporate front, miners and oil companies were the ten largest fallers on the FTSE as the economic worries took their toll.
On the second line, Carpetright was 9.44% lower at 643p after its trading update. Shares in estate management group Connaught - which relies heavily on government spending - were down another 21% and have now lost 67% since Friday's shock profit warning.
The group calculated it will lose around £80 million in revenues in 2010 and £120 million in 2011 following the Emergency Budget.