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The FTSE 100 Index closed down by 34.64 at 5499.23.
The London market continued to come under pressure today after a credit rating agency hit Germany with a negative outlook and added to ongoing fears over the future of the eurozone.
The FTSE 100 Index was 10 points lower at 5523 after a pounding yesterday when it fell 2%, wiping £30 billion from its value amid concerns over Spain and Greece. Moody's last night lowered its outlook on Germany's credit rating to negative from stable, denting faith in Europe's strongest economy.
The move came after a turbulent day for the single currency bloc, which saw the yield on 10-year Spanish bond hit euro-era highs of 7.5% as it became increasingly likely that the country would need an EU bailout.
Spain was battling last night to avert a fully-fledged sovereign rescue after borrowing costs spiralled out of control, with dangerous knock-on effects in Italy and Eastern Europe.
Louise Cooper, markets analyst at BGC Partners, has told Daybreak that Spain's large economy means that the cost of bailing out the country will run the hundreds of billions of euros.
Asian stock markets mostly dropped today despite a sign China's manufacturing downturn has bottomed, as the possibility of a credit rating downgrade for Germany added to Europe's debt turmoil.
Global markets slid yesterday as Spain's borrowing costs soared, raising the risk that it will require a financial bailout that Europe probably cannot afford.
Moody's changing the outlook on Germany's credit rating to negative from stable dented faith in Europe's strongest economy and added to pressure on markets.
The FTSE 100 Index fell 117.9 points, or 2.1%, to 5533.9 amid worries that a raft of Spanish regions were poised to ask for government bailout funds, increasing the likelihood that the country itself will turn to the EU for help.
The fall wiped nearly £30 billion from the value of London's leading shares index, with all 100 companies losing value and banks falling up to 4%.
Sterling lost 0.8 percent to hit a session low of $1.5486 against the dollar, the lowest level in a week, pulled down by weakness as Spain's borrowing costs jumped to new highs.
The FTSE 100 Index was 124 points lower at 5526 in early trading amid speculation that a raft of Spanish regions were poised to ask for government bailout funds, increasing the likelihood that the country itself will turn to the EU for help.
Wall Street's Do Jones Industrial Average was also 1% lower as the yield on 10-year Spanish bonds rose to a euro-era high of 7.5% in a sign that investor confidence in the country's ability to control its finances is increasingly waning.
Vincent Forest, economist at the Economist Intelligence Unit, said: "It is now clear that Spain has entered a self-defeating cycle of austerity and economic contraction."
Mexican stocks fell sharply on Monday to a one-week low as concerns that Spain may need an international bailout weighed on riskier assets around the world.
Spain said it may extend the three month ban, announced today, on short-selling beyond Oct. 23.
The ban, imposed in the wake of heavy losses for Europe's equities markets, applies to any operation on stocks or indexes, but does not affect market makers.
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