Nervous traders wiped £26 billion from the value of London's leading shares index as eurozone fears returned to haunt world markets on Tuesday,
The latest sell-off, which followed a similar rout on Friday, left the FTSE 100 Index down 1.8% at its lowest closing point so far in 2012.
The turmoil was triggered after the leader of Greece's left-wing Syriza bloc said he will try to forge a coalition government that would tear up the austerity deal that underpins the country's €240bn (£190 bn) bail-out.
Alexis Tsipras' radical plans would likely see Greece default on its debts and be ejected from the single currency.
While it is far from certain that he will win enough support to form a government, another round of general elections next month now seems increasingly likely, casting more doubt on the future of Greece.
There were similar falls on other markets, with Germany's Dax down nearly 2%, France's Cac-40 nearly 3% lower and the Dow Jones Industrial Average in the United States more than 1% lower as the London market closed.
The euro was sold off on currency markets amid the worries over the future of the eurozone.
The pound now buys 1.24 euro - a three-and-a-half-year high against the single currency. This is good news for holidaymakers travelling to the continent but a blow to exporters to the currency bloc.
The fresh round of volatility on world markets came after elections in Greece over the weekend failed to lead to the formation of a coalition government. The Greek stock market closed at its lowest level since 1992.
Adding to the nerves, France's new president Francois Hollande has said he will look for alternatives to austerity, prompting fears of a rift between him and German chancellor Angela Merkel.
The political uncertainty has added to fears over the strength of the recovery in the eurozone, with several countries including Italy, Spain and Greece back in recession and fears mounting that the US economy is slowing.
Simon Furlong, a trader at Spreadex, said: "Investors are nervously waiting to find out what direction France's new president will take with regards to Germany.
"Athens is also in a bitter struggle to find a coalition government, with repeat general elections a distinct possibility.
"This period of uncertainty for Greece can only make matters worse. Greece needs a strong united government in order to pass measures to give the country some direction."
The FTSE 100 Index closed down 100.5 points at 5554.6.
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PA | Posted: 08/05/2012 19:29 Updated: 09/05/2012 09:49