Dealers said investors were reacting to a statement from Prudential which scrapped its current dividend policy, raising fears that dividend cuts could follow.

Shares in Prudential dropped nearly 18% while stock in rivals Friends Provident, Royal & Sun Alliance and Legal & General all closed 9-11% lower as investors calculated those companies might take similar action.

The FTSE 100 ended the day 80.3 points down at 3621.5.

There were also some big falls in firms outside the top 100 index - airline Easyjet and health club group Holmes Place were both punished for announcing disappointing news.

Dividend fears

With interest rates low by historical standards, some market experts say the relatively high level of dividends makes shares worth buying.

But, with prices depressed, investors have little expectation of capital growth and are sensitive to possible dividend cuts.

Any widespread move by companies to trim payouts might lead to fresh stock market falls, experts say.

"If European companies start to cut dividend yields this could start to hold the market back," said Steve Barrow, a currency strategist at Bear Stearns.

"[It] is just another excuse for investors to sell stocks."

The Frankfurt and Paris stock markets were about 4% down while in New York the Dow Jones index was 1.3% lower by late morning.

"A war with Iraq is getting closer, making investors nervous, after the United States and UK stepped up their efforts with a new resolution," said Gert de Mesure, head of equity strategy at Delta Lloyd Securities in Antwerp.

Low flying

Shares in Easyjet slumped by 12% after the airline said its average fares had fallen as it battled to entice passengers onto its planes.

The carrier said average fares were 6% lower in the four months to the end of January compared with the same period a year earlier.

Easyjet said the economic slowdown was also to blame.

"It is not just competition, if you look at the economies of the world at this time, people don't have as much money to spend," a spokesman said.

Also in the FTSE 250, Anglo-Dutch steelmaker Corus was under pressure following delays in the sale of its aluminium arm to the French firm Pechiney.

Corus shares stood 25% lower at one point as investors worried that opposition to the sales from Dutch workers could scupper a chance to raise badly needed funds.

But the shares later clawed back most of their losses.

Out of shape

Fitness group Holmes Place was savaged by investors after the company said this year's results would be well below expectations.

It also said it would take longer than expected to renegotiate its banking facilities.

Shares in the firm nearly halved following the news.

The company said the publication of its full-year results, which had been scheduled for March, would be put back until the banking problem was solved.