The FTSE 100 plummeted to a hefty loss after concerns that inflation will rise sent global investors “freaking out”.
The index dropped by 3% in early trading before paring back some of its losses, while the other major markets also closed lower.
A sell-off in US tech stocks and rising prices for goods leaving China helped to fuel growing fears over inflation and spook market traders.
London’s top flight closed 175.69 points lower, or 2.47%, at 6,947.99 on Tuesday.
Michael Hewson, chief market analyst at CMC Markets UK, said: “European stock markets have taken a beating over concerns about rising inflation expectations, even though bond markets aren’t exhibiting that much in the way of distress.
“Investors do appear to be freaking out a little bit over the recent sharp rise in commodity prices that we’ve seen in the past few weeks, and which has seen US five-year inflation expectations push sharply higher.
“We’ve also seen similar moves in EU five-year inflation expectations but we are only back at levels last seen at the end of 2018.”
The other major European markets saw slightly lower losses than the FTSE but still lost much of last week’s total gains.
The Dax decreased by 1.82% and the French Cac moved 1.86% lower.
Across the Atlantic, the markets opened sharply lower, following on from low sentiment on Monday evening, before tempering slightly throughout the Tuesday session.
Meanwhile, sterling was cautious ahead of the announcement of the latest GDP data for the first quarter of 2021 on Wednesday morning.
The pound increased by 0.03% versus the US dollar to 1.414 and was flat against the euro at 1.163.
In company news, British Airways owner IAG plunged in value after it raised another 825 million euros (£709 million) in seven-year debt in a bid to shore up its finances.
The airline giant has said it is burning through around 175 million euros each week while most of its flights remain grounded.
Shares in the business closed 15.53p lower at 194.32p as other airline rivals also finished lower.
Deliveroo was one of few UK firms to make gains as its stock was boosted by a “buy” rating by the Bank of America.
The takeaway delivery firm closed 2p higher at 249p as a Spanish ruling that couriers must be converted to become staff workers in the next three months took an edge off earlier gains.
Guarantor lender Amigo lost almost a quarter of its value after the FCA said it would appose the firm’s rescue plan after Amigo received approval to hand customers owed compensation with lower pay-outs.
Shares in the business were down 6.58p at 22.92p at the close of play.
The price of oil was robust as it recovered during trading from initial concerns over reduced oil demand from refineries.
The price of Brent crude oil increased by 0.04% to 68.35 dollars per barrel.
The only riser on the FTSE 100 was the London Stock Exchange Group, up 4p at 7,080p.
The biggest fallers of the day were IAG, down 15.53p at 194.32p, Renishaw, down 405p at 5,625p, Melrose, down 10.5p at 156p, and Flutter, down 685p at 13,355p.