The FTSE 100 fell more than 4 per cent or 156 points to 3,674.08, taking it to levels last seen during the last sell-off in October. The benchmark index last closed under 3,700 in April 2003.

The falls in London were mirrored in Europe and came after big losses in Asia, where the FTSE Asia-Pacific  index traded at its lowest since August 2003.

David Morrison, CFD market strategist at GFT, said: “This has been a grim start to the month with nothing positive on the horizon.”

He added: “The worry is that it won’t just be the usual suspects going back to the government for more money, but, as with AIG in the US, as asset prices fail to find a bottom, the loss in confidence seriously impairs the ability of other sectors to function effectively.”

HSBC will offer 5.06bn new shares at 254p each, a 48 per cent discount to Friday’s closing price on a 12-for-5 basis. It will be the biggest cash call ever made in the UK without being underwritten by the government. It sent shares in the bank 20.1 per cent lower to 392p.

The bank ’s move to strengthen its balance sheet came as it wrote down $10.6bn relating to its exposure to the US lending market via its Household International unit, a major subprime lender. It closed its US lending operations to new business. Stephen Green, chairman, said: “With the benefit of hindsight, this is an acquisition we wish we had not undertaken.”

Matt Buckland at CMC Markets looked the wider implications of HSBC’s news: “What is perhaps most worrying here is the fact that HSBC was seen as better placed than most of its peers and essentially any hope that confidence was returning to equities has been quashed once again.”

Results from AIG and a third government rescue in as many months also unsettled investors. The US insurer revealed the biggest corporate loss in history and unveiled a radical plan to break itself up in exchange for a $30bn loan from the government.

Banks and insurers were among the heaviest fallers in London. Royal Bank of Scotland lost 5.2 per cent to 21.93p on fears it would be nationalised soon. Lloyds Banking Group fell 9.8 per cent to 52.6p and Barclays was 8.4 per cent weaker at 85.7p. Standard Chartered, the UK bank focused on emerging Asian markets that will report annual results on Tuesday, fell 10.9 per cent to 591½p.

UK Insurance stocks, also subject to dealing-room talk of a potential need for capital raising, stood out once again. Legal & General was 9.2 per cent softer at 36½p, Prudential lost 7.7 per cent to 259.3p and Aviva fell 7.4 per cent to 267.8.

“If investors take a step back we have an American insurer that has been called ‘too big to fail’ receiving a third bailout, and HSBC, one of the outperforming banks this year, looking to raise capital at a very discounted rate and cut its dividend. This means the stench of liquidity concerns remain entrenched in banking systems and as such, investors are losing out on reasons to buy banks right now,” said Joshua Raymond, market strategist at IG Index.

The extent of the overall losses was exacerbated by fresh falls for miners, harried by repressed base metals prices on commodities markets. Rio Tinto fell 6.7 per cent to £16.80 and Anglo American lost 7.1 per cent to 930.5p.