UK shares plunged in the biggest points fall since the economic crisis of November 2008, amid fears of a global recession.
The FTSE 100 Index closed 4.7 per cent, or 246.8 points, lower at 5041.6 on Thursday. The fall represents around £64 billion.
Markets also fell across the world. Germany's Dax and France's Cac-40 fell by 5 per cent, while in the US the Dow Jones has slumped by 522 points to 10,601, a low for the year.
The US Federal Reserve has warned of a "significant downside risks to the economic outlook" and in a process named Operation Twist had moved to keep US interest rates lower for longer.
But traders appear to have been unconvinced by the latest attempt to prop up the country's troubled economy.
Christine Lagarde, the head of the International Monetary Fund, has warned that there appears to be a lack of political "momentum and spirit" to deal with the problem.
"In 2008 there was a much wider path for recovery because the sovereigns had more room to maneuver, they could engage more in supporting the financial system, and they did at the time," she said.
"They incredibly ably manged to avoid protectionism to kick start growth to make sure the financial pipes that fueled the economy were working again."
She added: "They don't have as much maneuvering room now. they don't have as much munition."
But Speaking in New York Lagarde said that was not her main worry.
"What is lacking today, and I hope will be rejuvenated, is the collective momentum and the spirit that i saw at London G20 meeting...that was a moment when all leaders came together," she said.
Earlier on Thursday Robert Zoellick, The World Bank president, warned that politicians had "no excuse" for not acting to prevent a double-dip recession.
"The world is in a danger zone," he said. "In 2008 many people said they did not see the turbulence coming, leaders have no such excuse now."
He said "dangerous times call for courageous people" and Europe, Japan and the United States must act swiftly to address their economic woes before they became bigger economic problems for the developing world.
"I still think a double dip recession for the world's major economies is unlikely, but my confidence in that belief is being eroded daily by the steady drip of difficult economic news," he said.
Prime Minister David Cameron has put his name to a letter sent to French President Nicolas Sarkozy the current chair of the G20, to urge him to take action to tackle the problem.
The letter warns: "We have not yet mastered the challenges of the crisis. Global imbalances are rising again. External risks to the stability of our banks and our economies are reaching pre-crisis levels.:
It adds: "At the same time, the confidence of citizens, businesses and markets has been damaged due to the lack of visible political will: this in itself is holding back the recovery."
The letter has so far not been signed by the United States or any member of the eurozone, but has been agreed to by other G20 members including Australia, Canada, Indonesia, Mexico and South Korea.