The British pound dived Tuesday after German Chancellor Angela Merkel reportedly warned that a Brexit deal was "overwhelmingly unlikely", further stoking fears of a disorderly and costly departure from the EU.
Merkel told British Prime Minister Boris Johnson that a deal was doomed to fail unless London agreed to keep British-run Northern Ireland that borders EU-member Ireland in the bloc's customs union, a Downing Street source said.
The host of next week's European summit, EU Council president Donald Tusk, in turn accused British Prime Minister Boris Johnson of trying to shift blame for the failure of the Brexit talks.
"Markets are having to focus on the various potential outcomes which are now imminent," Interactive Investor analyst Rebecca O'Keeffe told AFP.
"A deal looks very unlikely unless the EU blinks first."
- 'Greater chance of no-deal' -
She added: "For many, the word of the PM is government policy, hence the global market is moving towards pricing in an ever greater chance of a no-deal."
Losses were exacerbated by official data showing that British productivity tumbled at its fastest rate in five years in the second quarter of 2019.
Stock markets on both sides of the Atlantic meanwhile posted losses on growing investor doubts over chances of success in this week's China-US trade talks.
Losses for London stocks were limited thanks to the weak pound, which boosts multinationals earning in stronger currencies, but Paris and Frankfurt fell more than one percent.
Meanwhile on Wall Street the Dow Jones index was also down more than one percent in late morning trading.
There had been a general feeling in recent weeks that a solution to the long-running US-China tariffs saga may be found, providing some much-needed support to equities in the face of worsening economic data.
- Trade talks -
Beijing's top trade envoy Liu He is due to meet US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin on Thursday.
But observers warn it is unlikely progress will be smooth, with reports this week saying China had cut back on the number of areas it is willing to discuss, suggesting leaders sense weakness in the White House as Donald Trump faces impeachment proceedings and a slowing economy.
The US on Monday announced it would blacklist 28 Chinese firms that it says are implicated in rights violations and abuses targeting Uighurs and other mostly Muslim minorities, which could futher complicate the trade talks.
The trade meeting comes just over a week before a new round of punitive tariffs is due to be imposed on China.
"There is a feeling the trade talks are over even before they have begun," said market analyst David Madden at CMC Markets UK.
Further dampening sentiment was the statement by the IMF's new head, Kristalina Georgieva, that trade disputes had helped push the global economy into a "synchronised slowdown".
While trade tensions had been talked about as a danger to the economy, "now, we see that they are actually taking a toll," she said.
- Key figures around 1540 GMT -
Pound/dollar: DOWN at $1.2204 from $1.2293 at 2100 GMT
Euro/pound: UP at 89.72 pence from 89.25 pence
Euro/dollar: DOWN at $1.0948 from $1.0971
Dollar/yen: DOWN at 107.04 yen from 107.26 yen
London - FTSE 100: DOWN 0.8 percent at 7,143.15 points (close)
Paris - CAC 40: DOWN 1.2 percent at 5,456.62 (close)
Frankfurt - DAX 30: DOWN 1.1 percent at 11,970.20 (close)
EURO STOXX 50: DOWN 1.0 percent at 3,438.43
New York - Dow: DOWN 1.1 percent at 26,186.56
Tokyo - Nikkei 225: UP 1.0 percent at 21,587.78 (close)
Hong Kong - Hang Seng: UP 0.3 percent at 25,893.40 (close)
Shanghai - Composite: UP 0.3 percent at 2,913.67 (close)
Brent North Sea crude: DOWN 0.8 percent at $57.90 per barrel
West Texas Intermediate: DOWN 0.8 percent at $52.33