Coronavirus fears weigh on oil and travel stocks
Mining shares also hit as markets fear the global economy will be impacted
Travel, mining and airline stocks were badly hit by fears the coronavirus would precipitate a global economic slowdown.
Markets were spooked by the potential for the flu-like virus to accelerate and spread, as the death toll in China hit 81.
The price of a barrel of oil fell to $53 amid concerns that China's economy would be hit hard by the government lockdown on travel and manufacturing.
In the UK, the FTSE 100 index fell by 173.93 points, to 7,412.05 responding to steep losses overnight in Japan. The Nikkei lost more than 2 per cent of its value.
Markets across Europe fell sharply and Wall Street was trading 1.5 per cent down in mid-morning trading at 28,559. The S&P 500 was also affected, falling 1.5 per cent to 3,245.
Safe-haven assets such as gold and government bonds rose strongly, as did Bitcoin, which increased to £6,718, a rise of almost 2 per cent.
The UK companies worst hit were those with exposure to China or its economy. The Chinese government has said the country will remain on holiday but on lockdown for another week. Traders fear will this affect manufacturing output.
Airlines and hotel groups, which could see a massive slowdown in trade, were part of the sell-off, as were mining and natural resources firms that serve the needs of China's manufacturing boom.
Fidelity China and Premier Oil were among the biggest fallers in the UK, down almost 6 per cent each. JP Morgan China was down almost 7 per cent.
Among the travel companies, IAG was down 4.4 per cent and EasyJet fell 5 per cent. Anglo American and Rio Tinto also suffered from negative sentiment, down 4.5 per cent.
While the coronavirus fears were weighing heavily on stocks, there were also concerns about the earnings season in the US this week which may be disappointing.
The Federal & Market Committee (FOMC) is scheduled to start tomorrow, with figures due on Wednesday. US Q4 GDP numbers, which have been revised down, may not meet expectations.
The VIX volatility index is rising, suggesting that institutional investors are hedging their portfolios against losses in the futures market. It rose to 8.12, an increase of 3.56 points or 24.45 per cent.
Investors were divided over whether the day's losses were a market correction that will be resolved by next week, or the start of a longer and more serious downturn.
Some industry observers took a more sanguine view, saying that a sell-off had been overdue and traders had seen an opportunity to take profits after markets enjoyed a good run.
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