The FTSE 100 closed 156.5 points, or 2.6% lower, at 5982.2, wiping £41bn off the value of its constituent companies and crucially falling below the psychologically important 6,000 mark.
The FTSE 250, which is a better indicator of the health of UK businesses than the more global FTSE 100, fell even more sharply.
It closed 1120.2 points, or 7% lower, at 14967.9, wiping £22bn off the value of its constituent companies.
RBS closed trading down 15.1% , which will make the government's target for revenue from its sale practically impossible.
The FTSE 100 fared better than most - closing 3.2% down on Friday.