The FTSE 100 index closed down 3.7% at its lowest in more than seven weeks, with commodity, travel, and banking stocks leading the sell-off.
Britain said the virus variant spreading in South Africa was considered by scientists to be the most significant one found yet and it needed to ascertain whether it rendered vaccines ineffective.
Tourism group TUI fell almost 10% while airline companies like Wizz Air, easyJet and British Airways-owner IAG lost around 15% after UK authorities imposed travel restrictions from South Africa and five neighbouring countries.
"We don't know so much about this variant yet but if it's serious, it could change the macro scenarios altogether," said Roland Kaloyan, head of European equity strategy at Societe Generale.
"The Bank of England will not hike rates in a period where we can enter lockdown and put serious burden on the economy."
Supply-chain worries and inflationary pressures have kept the FTSE 100 under pressure, with the blue-chip index lagging its European peers so far this year.
Shares of major UK lenders HSBC, Lloyds Bank and Barclays all fell almost 5% as investors scaled back expectations for an interest rate hike in December. [GBP/]
"Over the last month, the banking sector has benefited from a steeper yield curve but with the news today we see a lower bond yield and that's also not quite positive for the long term," said Kaloyan.
Energy and mining stocks fell 6.3% and 4.4%, respectively, tracking a slump in commodity prices on fresh economic slowdown fears. [O/R] [MET/L]
The domestically focussed mid-cap index dropped 3.0%, faring a bit better than its blue-chip counterpart as online trading platform Plus500 and CMC Markets gained ground.
(Reporting by Bansari Mayur Kamdar in Bengaluru; editing by Uttaresh.V and Subhranshu Sahu and Kirsten Donovan)
By Bansari Mayur Kamdar