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."
More top news
Arkansas has become the first US state in 17 years to carry out back-to-back executions after putting two inmates to death.
Up to three million children risk going hungry over the school holidays, with increasing numbers of families relying on food banks, MPs say.
Tuesday will be a cold and windy day across the British Isles with a mix of sunshine and showers.