Britain's biggest banks have lost £2billion from their combined market value as fears over Spain's creaking finances saw investors dump financial stocks.
Lloyds Banking Group lost nearly 5 percent of its value, while Royal Bank of Scotland shed nearly 4 percent and Barclays fell by more than 1 percent. HSBC also dipped into the red.
Traders were troubled by developments in Spain, where the government's implied cost of borrowing is creeping higher towards unsustainable levels amid fears the struggling country will require a bailout from the European Union and its partners.
Banks also fell out of favor after equity analysts at JP Morgan Cazenove downgraded the sector amid concerns over the impact rising funding costs will have on profits.
"Spain remains very much front and centre for global markets, as its borrowing costs remain near what many would consider unsustainable levels”, said Rupert Osbourne, futures dealer at IG Index.
"If there is one thing that we have learnt from the past couple of years of European debt, it is that these problems tend not to be resolved quickly and painlessly - and it does set the stage for potentially more volatility in the weeks ahead", Osbourne added.
The yield on Spain's 10-year government bonds hit 6.1 percent, moving closer to the 7 percent which forced Greece, Ireland and Portugal to seek financial help from the EU. The rate is at its highest level since the new conservative government took office in December.
The government has implemented a tough austerity package of spending cuts, as well as labour and financial reforms, but investors are concerned by Spain's banks, which are battling with bad loans from a collapsed property market.