The FTSE 100 closed down 1.3 per cent after some of the morning losses were eroded by an afternoon rally.
The index ended the day down at 5,440.50 down 72.20 points and wiping out gains made on Monday.
Biggest gains went to Marks & Spencer up 7.26 per cent to 232.75p ahead of its make or break AGM tomorrow and amid takeover rumours.
British Airways rose 4.61 per cent, while retailers Kingfisher and Tesco rose 3.26 per cent and 3.07 per cent respectively.
Reckitt Benckiser rose 2.96 per cent.
London Stock Exchange Group fell 7.48 per cent amid forecasts of revenue drops.
Elsewhere miners and oil suffered with Cairn Energy down 7.17 per cent, Ferrexpo falling 6.99 per cent, Eurasian dropping 6.79 per cent and BHP Billiton slipping 6.46 per cent.
Outside the FTSE 100, moneysupermarket.com fell 32.19 per cent, Bradford & Bingley dropped 17.86 per cent and Alliance & Leicester was down 13.58 per cent.
David Jones, chief market strategist at IG Index, said: "It has been another volatile session, driven by sentiment in the US markets.
"Much has been made of the fact that with the FTSE 20 per cent below its highs, it is now an 'official' bear market. But a look at the broader indices, such as the FTSE 250 which is already back to levels not seen since 2005, probably gives a truer picture of how weak the London market has been over the past couple of months.
"The blue chip FTSE 100 is still above its lows for 2008 but with the US indices still seeing any meaningful rallies smashed before they have a chance to develop, some traders seem to becoming resigned to the opinion that it may just be a matter of time before 5300 is cracked."