Turbulence on global stock markets has continued amid concerns over an end to economic stimulus in the United States and an unfolding credit crunch in China.
The London market closed in the red again on Monday after enduring heavy falls in recent weeks over plans by the US Federal Reserve to end its vast money-printing drive.
The FTSE 100 Index ended down 87.1 points at 6029.1 after enduring its fifth consecutive week of falls last week.
Government borrowing costs also continued to rise - with 10-year UK gilt yields hitting their highest level for almost two years - in response to plans by the US Federal Reserve to taper quantitative easing (QE) this year and end it next year.
While still low by historic standards, 10-year gilt yields rose above 2.5% today as the cost of government bonds fell, echoing a sell-off in government bonds around the globe. Bond yields move inversely with prices.
Meanwhile, lending rates between banks in China have soared as high as 13.4% in recent days as the country's central bank attempts to reduce banks' reliance on credit under plans to rebalance its economy.
Global stock markets reacted nervously, with the Hang Seng index in Hong Kong closing down 2.2% overnight and Japan's Nikkei falling 1.3%. Germany's Dax and France's Cac 40 also closed sharply lower today and the Dow Jones Industrial Average was down in early trading.
Michael Hewson, senior market analyst at CMC Markets, said: "Fears of a continued cash squeeze in the Chinese banking system has seen European markets continue their soft tone.
"This uncertainty combined with rising apprehension over the pace of future asset purchases from the Federal Reserve has seen stock markets pick up where they left off last week and hit fresh lows for 2013."
The People's Bank of China has refused to pour new funds into the economy, and on Monday insisted credit conditions in the country remain "reasonable".
Instead it urged banks to "prudently manage liquidity risks that have resulted from rapid credit expansion" by holding back the pace of loans.
Surging lending rates between Chinese banks, which have since settled below 10%, are part of the country's clamp-down on so-called "shadow banking" - where non-bank investment firms and state organisations lend to each other.
China is attempting to rebalance its rapidly-growing economy away from credit-fuelled growth and on to a more sustainable path driven by domestic demand.
Chinese investment has been around half of the country's gross domestic product (GDP) in recent years as the country embarked on a massive debt-funded building programme, which helped send global commodity prices soaring.
Ratings agency Moody's said the lending squeeze has "positive intent but entails risks".
It said: "We think it is prudent for China to curb its credit growth to more sustainable levels in order to prevent a build-up of excessive leverage."
But Moody's warned this could result in higher bad debts and lower profits for smaller Chinese banks, threatening their safety and depriving firms of credit.
China's booming growth has eased in recent years, falling to 7.7% in the first quarter of the year.
Recent turbulence has wiped out gains made by the London market this year and is in stark contrast with a just month ago, when markets were booming on stimulus-induced highs.
In May the FTSE 100 threatened to beat its highest close of 6930.2 points, set in 1999 during the dotcom boom, while markets in the US and Europe hit record highs.Suggest a correction