The FTSE 100 shed almost 150 points as it sank 2 percent and the more domestically-exposed FTSE 250 slipped 1.8 percent or almost 350 points. Both indexes suffered their worst day since December.
Sterling rallied after the euro weakened and as European Union leaders gave Prime Minister Theresa May two more weeks, until April 12, to decide how to leave the European Union.
"It's clear the EU for now doesn't want to be seen to force Britain out, but its patience won't last forever," Markets.com analyst Neil Wilson said.
Weighing on the main index were drug maker AstraZeneca, which hit a high in the last session on the pound's weakness, British American Tobacco and Diageo, the world's largest spirits company.
"The pound may want to enjoy its gains while it still can – it is in for another go around on the Brexit rollercoaster next week," said Spreadex analyst Connor Campbell.
Poor manufacturing data from Europe and the United States implicated trade tensions for hurting factory output and once again fanned fears of an economic slowdown.
CMC Markets analyst Michael Hewson said there would probably be a lot more concern about a global manufacturing recession following the downbeat German data, which he called unexpected.
The worry led to losses across the board on FTSE 100 with financials falling to their lowest since Jan. 14. Oil majors Shell and BP also dragged as crude prices slipped, capping off a forgettable day for the main bourse.
Housebuilders, which tend to be most exposed to any economic hit, handed back early gains to be down 1.4 percent.
Pearson, however, rose 1.7 percent after JP Morgan upgraded its rating and said the education publisher's model adjustment from print to digital would see long-term growth
Among midcaps, Aggreko, the world's largest temporary power provider, rose 3.5 percent as brokerage Stifel upgraded the stock.
Struggling department store group Debenhams plummeted over 45 percent after saying some restructuring options it was considering would result in no equity value for its shareholders.
Uk & Europe
an markets lag Wall St. since Brexit referendum - https://tmsnrt.rs/2Ojcb9U
(Reporting by Muvija M and Yadarisa Shabong, additional reporting by Shashwat Awasthi in Bengaluru; editing by Gareth Jones)
By Muvija M and Yadarisa Shabong