The FTSE 100 has fallen below the 7,000 mark for the first time in more than a year, as US president Donald Trump ratcheted up fears over a global trade war with plans for targeted tariffs to apply 'maximum pressure' on China.
The UK blue-chip index fell 51 points, or 0.7%, to 6,988. Investors were unnerved by the White House's plans to apply tariffs on imports from China, claiming the country was encouraging the theft of intellectual property from US businesses.
US trade negotiator Robert Lighthizer told Congress the White House was looking to put 'maximum pressure on China' through the measures, expected to be put in force by Trump today.
'We think it is perhaps the most important thing that will have been done in terms of rebalancing trade.'
The news weighed on global stock markets, with European markets falling into the red. The German DAX 30 and France's CAC 40 both dropped 1%.
The FTSE 100 was also hobbled by the pound's surge against the dollar, which suffered its biggest fall in nearly two months despite an interest rate rise by the US Federal Reserve, by 0.25% to a target range of 1.5% to 1.75%. The pound was trading at $1.414 after the dollar's overnight fall.
A stronger pound tends to hamper the FTSE 100, whose stocks rely on overseas markets for around three-quarters of their earnings.
New Federal Reserve chair Jerome Powell struck a more dovish tone than expected, saying that 'there is no sense in the data that we're on the cusp on an acceleration in inflation'.
The Fed also signalled is was on course for three interest rate rises this year, rather than the four some investors had been anticipating.
Deutsche Bank's Craig Nicol said the market reaction was 'perhaps just reflective of what were elevated hawkish expectations going into it'.
'A for new Fed chair Jerome Powell, well in golfing terms it felt like he struck it straight down the middle of the fairway. That's to say that he largely gave away an impression of one of continuity under his new role as chair, and an emphasis on the Fed sticking with its gradual approach to tightening.'
Micro Focus (MCRO) was the biggest faller on the FTSE 100, down 6.6% at 908p as credit ratings agency Moody's changed its outlook on the embattled software company's debt to negative.
Reckitt Benckiser (RB) led the risers, up 5.3% at £59.26, as the consumer goods group pulled out of talks with US pharmaceutical giant Pfizer (PFE.N) over buying its consumer healthcare business.
On the FTSE 250, Ted Baker (TED) was a big faller, down 7.7% at £27.10 as the fashion retailer warned of a tough environment ahead.
Interserve (IRV) was the biggest 'small-cap' riser, up 8.1% at 95p as the outsourcing group agreed a vital refinancing deal.