More than 400 points was wiped off the FTSE 100 Index in devastating early session trading, taking the FTSE below the 4000 level.

The falls follow similarly dramatic overnight losses on Wall Street and in Asia.

Japan's benchmark Nikkei 225 index closed almost 10 per cent lower, down 881 points lower in its worst session since Black Monday in 1987, while the Dow Jones Industrial Average closed below 9000 for the first time since 2003.

The FTSE 100 Index was down 359.5 points at 3953 after 20 minutes of trading.

The latest slump came despite co-ordinated interest rate cuts and this week's efforts by the UK Government to bolster UK banks.

Matt Buckland, a trader at CMC Markets, said markets were reeling because of recession fears and the fact that the fire-fighting efforts of central banks worldwide had not resulted in any thawing of interbank lending.

He said: "US and European taxpayers have collectively tried to dig the financial sector out of one almighty hole but the response certainly hasn't been as planned."

It was the first time the FTSE 100 has been below the 4000 barrier since 2003.

Banking stocks were among the worst affected in the bloodbath, with the Government's bail-out package failing to reassure panicked investors.

Halifax Bank of Scotland plunged 24 per cent into the red, with its merger partner Lloyds TSB down 14 per cent and Barclays also suffering a 14 per cent fall.

Insurers were also taking a hammering after a brief respite yesterday, with falls compounded by news that Japanese life insurance firm Yamato Life Insurance Co had collapsed - the first financial firm in Japan to fail due to losses linked to the global financial crisis.

In London, Standard Life shares dropped 14 per cent, Friends Provident fell eight per cent and Legal & General lost 10 per cent.

The Bank of England's surprise rate cut earlier this week failed to shield housebuilders from the stock market chaos.

Barratt Developments dropped 17 per cent in the FTSE 250 Index.