Ignoring the upbeat UK economic news, London's benchmark FTSE 100 took its cue from jittery European bourses and closed 134.57 points lower at 5703.8, a drop of 2.3%.
Markets had opened lower after the minutes of the Federal Reserve's policy making committee appeared to rule out a third bout of quantitative easing, the programme of bond purchases by the central bank that has twice before boosted the US money supply.
The mood further darkened on news of a deepening slump in the eurozone's services sector, which was shortly followed by a disappointing bond auction in Spain. Amid growing concerns that the respite from the debt crisis provided over the past four months by the European Central Bank is coming to an end, Spanish 10-year bond yields rose by more than 0.25 points to 5.7% after the government in Madrid struggled to sell new issues of debt.
Spain sold €2.6bn of bonds, at the low end of the government's target range, and to placate fears that it would eventually become the fourth eurozone country to require an international bailout, had to offer investors an interest rate of 5.338% on debt maturing in 2020. This was higher than the 5.2% forecast and the 5.156% when the debt was last sold in September 2011.
Economy Minister Luis de Guindos admitted on Wednesday that the economy's biggest risk was the belief that Madrid would not be able to bring down its budget deficit. In an interview with Reuters, de Guindos said Madrid was determined to reduce the budget deficit to 5.3% of national output in 2012 and to the European Union ceiling of 3% in 2013.
"The main negative effect, the main risk for the Spanish economy, is the perception that public accounts are not sustainable ... The 5.3% commitment is very important but the 3% commitment is very, very important," he said.
The ECB kept its key interest rate unchanged at 1% on Wednesday, with the bank's president, Mario Draghi, publicly resisting German pressure to begin preparing an exit strategy from the emergency funding operations that have been used to support Europe's banks.
Since the late autumn, the ECB has announced two long term refinancing operations (LTROs) in an attempt to provide cheap credit for banks struggling to obtain credit, but the president of the German Bundesbank, Jens Weidmann, has expressed concerns that the "wall of money" released by Draghi will lead to higher inflation.
But after a survey showed the eurozone's services sector moving deeper into recession last month, Draghi said: "Given the present conditions of output and unemployment, which is at historical high, any exit strategy talking for the time being is premature," he said, adding bluntly: "I think the president of the ECB is the one who has the last word on this."
The ECB president said the bank had not discussed changing rates, although some analysts believe a double-dip recession in the eurozone will lead to lower borrowing costs later this year. Draghi also sought to reassure the Bundesbank that the ECB was not going soft on inflation.
"All our non-standard policy measures are temporary in nature," he told the regular post-meeting news conference. "All the necessary tools are available to address upside risks to medium-term price stability in a firm and timely manner."
This rise showed financial markets expected governments on the eurozone periphery to deliver reforms, Draghi said, putting pressure on those countries to shape up rather than looking to the ECB to act further. "Markets are asking these governments to deliver," he said.
Following the falls in Europe, shares on Wall Street were down by 1% in morning trading, while the price of crude oil fell to $124 a barrel.
