At the close of markets, the FTSE 100 was down 5.19 per cent to 4,065.49, a fall of 222.52 points.
Sterling also suffered today – down 3.58 per cent to $1.483 – heading to its greatest one-day drop since 1992.
Against the euro £1 was worth €1.176, making €1 worth £0.85.
After last week's rally, the FTSE 100 saw steady declines throughout the day – with the miners leading the way.
Lonmin was down 20.48 per cent and Kazakhmys fell 19.15 per cent.
Vedanta Resources dropped 14.55 per cent, Anglo American fell 14.15 per cent and Eurasian fell 14.11 per cent.
The only firm to rise was software developer Sage Group up 0.66 per cent.
In Paris, the Cac 40 dropped 5.83 per cent and Frankfurt's Dax was down 6.10 per cent – neither index saw stocks rising in price.
In New York, the falls continued.
At 11:46 EST (16:46 GMT) the Dow Jones was down 4.21 per cent to 8,456.93 – with Citi Group leading the falls and no firms rising.
David Jones, chief market strategist at IG Index, said: "News that UK manufacturing shrunk at its fastest pace in 16 years and another drop for house prices according to the Hometrack figures put shares on the back foot right from the off this morning.
"The FTSE 100 quickly gave up the gains put on at the end of last week, demonstrating yet again how fragile sentiment is at the moment."
He added all eyes are now turned to Threadneedle Street and the Bank of England's interest rate decision on Thursday.
"The next few days may see some choppy trading ahead of this, with something of a bounce back into the announcement," Mr Jones said.
"But, as if we needed reminding, the economic back drop remains downbeat and the fiscal measures taken so far by both the central bank and the government seem to be doing little to stimulate confidence.
"It is hard to see any recoveries in stock markets as anything but short term at the moment and traders seem to be too willing to jump out of rallies very quickly, ahead of the perceived next major sell-off."
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