European markets have retreated after the Greek prime minister triggered fresh fears over the future of the eurozone with shock plans to hold a referendum on a vital rescue package for the region.
The FTSE 100 Index was more than 3% lower after George Papandreou's unexpected move cast fresh doubts on last week's much-heralded proposals to protect Europe from collapsing into recession.
Elsewhere, the Markit/CIPS purchasing managers' index revealed a decline in the UK manufacturing sector in October, fuelling fears of a double-dip recession and overshadowing better-than-expected GDP figures for the third quarter.
David Jones, chief market strategist at IG Index, said: "The decision by Greece to hold a referendum on the bailout is a shock to investors who thought that we were finally nearing the end. It raises the prospect of the crisis dragging on further still, continuing the uncertainty for stock markets."
The FTSE was more than 120 points lower at 5422.2 while Germany's Dax was 5.2% down and the Cac-40 in France was more than 4.5% lower.
The dismal opening in Europe followed a weak session in Asia where fears over the viability of the three-pronged EU rescue deal and weak Chinese manufacturing data troubled investors.
EU leaders last week agreed with banks a 50% haircut on Greek debt and to boost the eurozone bailout fund to one trillion euro (£870 billion), which follows an earlier decision to shore up banks' finances.
However, Greek leader Mr Papandreou threw a spanner in the works when he announced his debt-strapped country will hold a vote on whether to accept the deal next January. The decision came following large-scale protests in Greece against austerity measures demanded by the European Union but analysts have warned a "No" vote could have a serious knock-on effect.
The banking sector was worst hit by the fresh concerns, with Barclays falling nearly 10%, Royal Bank of Scotland losing nearly 8% and Lloyds banking Group dropping nearly 6%.
The Office for National Statistics revealed GDP grew 0.5% between July and September, ahead of City forecasts of around 0.3%, but this did little to cheer traders.