The FTSE 100 index finished at 3,739, down 121 points on the day as fears over the US economy and Germany's election result hit investor confidence.

The falls in the UK were led by weak figures from banks and insurers but later compounded by falls in Wall Street.

Investor sentiment, undermined by the ongoing threat of war with Iraq, was hit by negative news from the US Conference Board which said economic recovery was fragile.

There's a fear that the new government won't be able to stabilise Germany, and that's having a knock-on effect here

UK-based dealer

A 3.5% fall in German shares, following Gerhard Schroeder's re-election as Chancellor in razor-thin victory also knocked confidence.

"There is very little to get enthusiastic about", said David Buik of spread betting firm Cantor Index.

Financial stocks fall

The FTSE 100 index started the day positively but had reversed early gains by mid-afternoon, to be more than 130 points down at one point.

The financial sector suffered steep falls, on fears of bad debts and weak balance sheets

Banking group Barclays was one of the biggest fallers, after investment bank JP Morgan cut its forecasts for 2002 and 2003 and unnerved the market about the sector as a whole.

Alex Scott, analyst at Seven Investment Management, said: "Bad debt, as recognised by JP Morgan last week, is still a concern.

"It's shown commercial lending can create some big hits."

Barclays' shares fell more than 30 pence to close 7.8% lower at 366.75 pence.

The bad news dragged down others in the banking sector, with Lloyds TSB falling 31.5 pence to 459.5p and Royal Bank of Scotland down 75p at �12.32.

Worries that big insurers would need to sell off shares to strengthen their balance sheets sent Royal & Sun Alliance 7% lower and Prudential fell 8%.

Watching the US

Market watchers said investors were also concerned that more bad news would come out of the US as the Federal Open Market Committee is scheduled to meet on Tuesday.

A profit warning from JDS Uniphase, the fibre-optic group, got Wall Street off to a slow start and reversed the gains of late last week.

Consumer sentiment figures on Friday will now be watched closely for any further signs that the markets are still struggling.

The tough mood in Europe hit sentiment on the market following the very close re-election of Mr Schroeder's governing coalition.

"There's a fear that the new government won't be able to stabilise Germany, and that's having a knock-on effect here," said one senior dealer.