Britain’s top share index hit its 15-month low as stocks such as commodities and banks saw big drops Wednesday.
It came amid fears of falling US inflation and weakening global growth, but also as Britain's unemployment rate fell to 6%, the lowest since 2008.
Sky News' Economics Editor Ed Conway said: "These unemployment numbers are far better than many people had expected, (but) there is a bit of a sting in the tail in that the wage numbers aren't quite as strong as some people had hoped for.
"So wages are still rising below 1%, whereas inflation is going up at an annual rate of 1.2%. People are still feeling the squeeze.
"Look across at the eurozone, 10 of the 28 countries in the European Union are facing deflation, falling prices and even greater numbers are seeing their producer prices - which is often a kind of early warning sign of what's going to happen to inflation -falling."
Pharmaceutical firms also saw falls following AbbVie's decision to reconsider its €42.5bn ($55bn) takeover bid for Shire.
The plunge began on Wednesday afternoon as soon as trading opened on Wall Street, where the value of stocks also briefly fell by more than 2%.
Henk Potts, director of global research at Barclays, said: "The stock market is in a fear mode at the moment on worries about global growth conditions and normalisation of US interest rates.
"But if the sell-off continues, it could prove to be a strong entry point into an asset class that we think will continue to outperform."
Shares in drug maker Shire plummeted 21.9% after AbbVie said it was reassessing its €42.47bn takeover plan following the US government's recent move to curb deals designed to reduce tax.
The FTSE 350 Pharmaceuticals and Biotechnology index fell 6.6% as a result, the index's biggest one-day percentage fall in six years.
John B Smith, senior fund manager at Brown Shipley, said: "It's bad news for the sector, which is struggling to find topline growth and the mergers and acquisitions activity was clearly an area of focus.
"A bid is still possible in the long term, but you are not going to see the higher premiums."
