The FTSE 100 share index has ended the day up by 1.9% after a volatile day of trading across Europe.
Dramatic dips in early trading sent the FTSE below the 5000 barrier for the first time since July last year. At one point the index had fallen as low as 4866, with banks such as Barclays and RBS among the worst hit.
Both the German DAX and French CAC40 indexes were also down, by 3% and 1% respectively.
By the close of trading however the FTSE had rebounded, and ended the day up 96 points at 5,165.
Despite this many banks still suffered losses, with the RBS losing 3.9% of its value.
The FTSE 100 Index has fallen more than 1,000 points in the past month. On Monday it posted four consecutive sessions of triple-digit losses for the first time in its 27-year history.
Negativity about the prospect of a default in either Spain or Italy is thought to be partly responsible for poor trading this morning, with confidence low about the eurozone countries' ability to manage their debt. However, it appears that moves by the European Central Bank to keep the cost of borrowing down for the two countries is starting to work, as both Spanish and Italian bond yields fell for the second consecutive day.
The are also worries about the levels of US Government debt following its credit rating downgrade. The US Dow Jones index fell by 5.6% during trading on Monday - its sixth-worst point decline in the last 112 years. Investors are now hoping that announcements from the US Federal Reserve will help to boost investor confidence following a policy meeting later on Tuesday.
Michael McCarthy, chief strategist at Sydney-based stockbroker CMC Markets, told the Press Association: "We're clearly in fear territory. The major driver here seems to be weakness in the US economy. There are fears that it's starting to stall and, if that's the case, the whole global growth scenario could fall over."