The FTSE 100 ended the day 1.5 percent lower with the FTSE 250 mid-cap <.FTMC> index giving up 1.3 percent.

The former hit its lowest since July 2016 while the latter closed a mere 0.15 percent away from a level that would confirm a bear market, as calculated from a peak close in June.

London's main bourse also recorded its steepest one-day drop since December 6, when the arrest of a top Huawei executive had renewed worries about U.S.-China trade tensions.

Both UK indexes initially gained on the back of Wall Street's surge on Wednesday, when the three main U.S. indexes recorded their biggest intraday percentage gains in almost a decade.

But U.S. stocks were lower on Thursday in a broad-based decline led by energy shares, giving up some of the gains from the day before.

"The sustainability of this (Wall Street) rally is questionable due to mounting concerns over economic growth next year..." Margaret Yang, CMC Markets analyst, told Reuters.

"The outlook remains cloudy on many political and economic uncertainties over trade war, Brexit, the U.S. government shutdown and continuous rate hikes by the Federal Reserve that will slowly drain market liquidity."

Shares in multinational exporters were the biggest drags on the UK's main bourse, which makes around 70 percent of its income abroad, over fears that a weaker dollar would dent the value of their U.S. revenues.

AstraZeneca tumbled 4 percent, while HSBC, Unilever, Reckitt Benckiser, GlaxoSmithKline and British American Tobacco all fell 1.4-3.7 percent.

Retailers were back under the spotlight, with more bad news pulling down household names such as Marks & Spencer, JD Sports, Dixons Carphone, Boohoo, Primark-owner Associated British Foods by 1.6-5.2 percent.

The fall came after data showed that the number of shoppers visiting stores on the day after Christmas, known in Britain as Boxing Day, fell again this year.

Supermarket chains Tesco, Sainsbury and WM Morrison also edged lower by 0.2-1.3 percent.

Investors dumped oil stocks too as crude prices fell on worries over a glut in crude supply, with oil major BP slipping 2.6 percent, followed by Shell with a 0.9 percent dip.

Global markets have been dogged by fears of a slowdown in economic growth, political uncertainties stemming from a government shutdown in the United States and the Fed's retained plans for more rate hikes in 2019.

Uncertainty over the terms of the UK's exit from the European Union and Prime Minister Theresa May's much-contested divorce deal has also weighed on investors, putting the indexes on track for their worst yearly losses since the financial crisis in 2008.

Further dampening the mood was data that showed business leaders' confidence in the British economy has sunk to its lowest level in more than one and a half years as the risk of a no-deal Brexit grows.

"The mid-term trend remains bearish for FTSE 100 and FTSE 250, and market confidence needs to be restored by major shifts in prospect of Brexit, growth and broader market rebound for this trend to be reversed", Yang added.

Defying the sentiment, online trading platform Plus500 advanced 2.7 percent after saying it expects 2018 results to top market expectations thanks in part to market volatility in recent months.

AIM-listed shares of Earthport Plc, a provider of payment services, roughly quadrupled in value to 28.2 pence, almost matching the 30-pence-a-share buyout offer from U.S. payments firm Visa Inc.

(Reporting by Muvija M and Shashwat Awasthi in Bengaluru, editing by Gareth Jones)

By Muvija M and Shashwat Awasthi