Over 20 billion pounds ($37 billion) was wiped off the value of Britain's biggest shares on Monday after Israel's assassination of the leader of Hamas added to already heightened security concerns.
The death of Sheikh Ahmed Yassin sparked fears of revenge attacks and came less than two weeks after deadly bombings in Madrid sent shock-waves through the market. Nearly every FTSE-100 stock closed in the red, dragging the blue chip index down 83.9 points, or 1.9 percent, to 4,333.8 - its worst finish since December 16. The drop erased 20.4 billion pounds off the FTSE.
Oil major BP, down 2.8 percent, and mobile phone giant Vodafone, off 2.5 percent, were the two stocks that exerted the most pressure on the index. The world's second-biggest bank, HSBC, also dropped two percent.
"Markets are very good at discounting economic and corporate news-flow but when it comes to politics they haven't got a clue," said Khuram Chaudhry, a strategist at Merrill Lynch.
"If you're not sure where the end is or what the implications are, if you don't need to hold a position or you can take money off the table, that's what people end up doing."
Traders added that the FTSE's 20-month closing highs at the start of March had provided an extra incentive for investors to trim their equity holdings.
The mood was also downbeat in New York, where the Dow Jones industrial average was off 0.9 percent and the tech-focused Nasdaq was down 1.3 percent when London closed.
Travel stocks were among some of the worst hit, as investors worried that geopolitical concerns might put off tourists and business travellers. Airline British Airways fell 5.3 percent and Carnival dropped 2.2 percent, even though the cruise operator beat expectations with its quarterly earnings.
Among smaller players, online travel agency Ebookers sank 24.5 percent after its annual profits fell short of expectations. Rival Lastminute.com lost 7.3 percent.
Retailers were also marked down as traders said worries over security might lead to faltering consumer sentiment. Next fell 4.3 percent, Kingfisher was down four percent and Marks & Spencer lost 2.6 percent.
Even stocks traditionally regarded as safe havens struggled. Cigarette maker British American Tobacco dropped 1.7 percent and utility Scottish & Southern Energy came off 1.5 percent.
"Today has been a good excuse for people to let a few things go and see how far the market will drift before they dip their toes back in," said Mark McCutcheon, head of dealing at brokers Gerrard. He said there appeared to be some support around 4,320 on the FTSE-100.
Plumbing and heating supplier Wolseley fell three percent after it sounded a cautious note on its North American markets, from which it gets about two-thirds of its revenue.
On the FTSE-250 index, Tullow Oil slipped 6.3 percent after the Irish-based oil and gas explorer said it had abandoned a well in Gabon, West Africa.
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