Chris Beauchamp, senior market analyst at IG, said: “Higher inflation concerns and the consequent worry that low yields do not provide the required insurance have sent the bond complex into turmoil, with the result that all asset classes are undergoing a re-rating.
“For the moment, it is still a correction rather than a complete rout, but we could see the situation worsen, with dire consequences for a stock market that already looks ripe for a major sell-off.”
The FTSE 100 ended the session 96.05 points lower at 6,933.8, having earlier been down more than 111 points.
No-frills airline EasyJet was the biggest top-flight loser, spiralling down 179p or 9.8 per cent to 1,654p, after a warning over the impact of French air traffic strikes took the shine off a rare first-half profit.
The gloomy outlook saw Flybe fall 2p, or 3.5 per cent, to close at 55p, while British Airways parent IAG ended the day 14.5p lower at 550.5p.
Also in focus was state-backed Lloyds Banking Group after the UK government’s stake in the bank was reduced to below 20 per cent following the latest share sale. Chancellor George Osborne has already said he wants a further £9 billion of Lloyds stock to be sold over the next 12 months, and the bank defied the market sell-off to edge up 0.42p to 87.02p.
Fellow bailed-out lender Royal Bank of Scotland headed in the other direction, down 6.8p or 1.9 per cent at 350.9p.
On the day of its annual meeting, Edinburgh-based life and pensions giant Standard Life dipped 6.4p to 468.5p.
Elsewhere, Greenock packaging firm BPI added 13.5p to finish at 710p after telling shareholders it remained confident about its outlook for 2015.