The Footsie's slide of more than 5 per cent, or 269.70 points to 4818.77, came after the nationalisation of Bradford & Bingley, a state bail-out of Belgium's Fortis and a takeover of US bank Wachovia by Citigroup.

The latest blows to confidence overshadowed the planned bail-out of the US financial system, which had looked set to win political support. Even that development was seen in a negative light, as analysts digested the potential implications of the deal and spending controls due to be imposed by lawmakers.

After London closed the US bail-out was rejected.

Weaker commodity stocks amid fears over the impact of a slowing world economy also hampered the London market. It lost £64bn in value and suffered its worst percentage fall since January.

In London, Royal Bank of Scotland was the most traded stock – down nearly 13 per cent or 27p to 181p – after its ABN Amro takeover partner Fortis was rescued.

As part of the deal it emerged that Fortis would have to sell its stake in ABN, bought as part of the RBS-led consortium's takeover last year – unsettling the bank's investors.

The nationalisation of B&B added to the trading pain as well, particularly as Spain's Santander is now an even greater presence within Britain's banking sector through the acquisition of its branches and £20bn savings book. Merger partners HBoS and Lloyds TSB were both sharply lower, down 31.3p to 142p and 333/4p to 2171/4p, respectively. HSBC, down 2 per cent or 14p to stand at 865p, was the only bank left relatively unscathed as its well-capitalised position drew fresh praise from Collins Stewart. But the fragile nature of the markets was highlighted by a trading statement from interdealer broker Icap, a top Footsie faller. Fears over second half trading caused shares to fall 24 per cent or 891/4p to 2891/4p, in spite of strong first half volumes on the back of high volatility in financial markets.

Tour operator Thomas Cook held firm, unchanged at 2023/4p after posting a strong trading update. The reduction in supply caused by the collapse of rival XL also meant that TUI Travel sounded positive, but shares were lower from the start and closed 81/2p down at 2121/2p.

Meanwhile, the latest worries for the financial sector dealt another blow for housebuilding shares, with confidence also rattled by a further sharp fall in mortgage lending figures from the Bank of England. Taylor Wimpey was down 81/4p at 343/4p while Barratt Developments was 191/2p lower at 102p.

Camera retailer Jessops bucked the gloom by announcing a deal with banks to extend existing debt facilities. In spite of further sales pressure, shares in the small-cap stock were 42 per cent higher, up 1.08p at 3.64p.

The only Footsie riser was Wm Morrison, up 11/4p at 2471/4p.

Biggest Footsie fallers were Icap, down 891/4p at 2891/4p, Man Group, off 681/4p at 3051/2p, HBoS slipped 311/4p lower to 142p and Xstrata fell 334p to 1578p.