FEARS over a potential trade war sparked by US plans to hike tariffs on steel and aluminium has wiped more than £27 billion off the value of London's blue chip stocks.
The FTSE 100 Index closed down 105.74 points to 7,069.9, as China expressed "grave concern" about the policy revealed by President Donald Trump.
German officials and industry groups have warned Mr Trump risks sparking a trade war with his closest allies if he goes ahead with his plans.
Chancellor Angela Merkel's spokesman Steffen Seibert said the tariffs would hurt international commerce and that the US would not solve issues of global overcapacity of both steel and aluminium with "unilateral measures".
European markets suffered in the wake of the announcement, with Germany's Dax dropping 2% and the Cac 40 in France plunging 2.4%.
On the currency markets, the pound was on the back foot, with the Prime Minister's Brexit speech ramping up the volatility for the UK currency.
Sterling was down 0.1% versus the US dollar at 1.37 dollars, as it reacted to a mixed report from the UK construction industry.
Output in the construction sector unexpectedly rebounded in February, but the industry remained under pressure as weak confidence and political uncertainty took its toll on demand.
Versus the euro, the pound was 0.4% lower at 1.11.
Brent crude edged down on the oil markets, dropping 0.2% to 64.05 dollars a barrel, as concerns over the global supply glut continued.
In UK stocks, investors sent takeover target GKN sliding as it confirmed talks with US firm Dana over a potential merger of its automotive business.
GKN said it received a number of approaches and has engaged in discussions with Dana "regarding a potential combination of Dana with GKN Driveline that would be effected mainly in equity".
Dana specialises in car part manufacturing.
It come after GKN firmed up the timings on Project Boost, its plan to persuade investors not to back Melrose's £7.4 billion bid, saying a proposal to separate GKN Aerospace and GKN Driveline into two listed companies would be set for mid-2019.
Shares were down more than 3%, or 15p to 420p.
Traders were also punishing Tesco following the Serious Fraud Office's decision to seek a retrial of three former Tesco executives over the supermarket's accounting scandal.
The fraud squad has written to Court to seek a retrial of the trio after the original case was discontinued in February because Carl Rogberg, one of the defendants, had a heart attack.
Rogberg, Chris Bush and John Scouler, Tesco's former finance chief, managing director and food commercial head, are accused of failing to correct inaccurately recorded income figures which were published to auditors, other employees and the wider market. All three maintain their innocence.
Britain's biggest supermarket closed down 6.6p to 202p.
The biggest risers on the FTSE 100 Index were Mondi up 71p to 1,911p, Rentokil up 9.4p to 272.5p, Randgold Resources up 174p to 5,940p, Burberry up 42.5p to 1,634.5p.
The biggest fallers were Rio Tinto down 142p to 3,638.5p, Old Mutual down 8.8p to 246p, GKN down 15p to 420p, Tesco down 6.6p to 202p.
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