Dire economic figures from the US wiped out July’s gains across the global markets as traders were shaken by the record contraction.
The US economy shrank at a dizzying 32.9% annual rate in the second quarter – by far the worst quarterly plunge ever.
European markets had already been deeply in the red before the GDP update, with early trading hit by a worse-than-forecast contraction in the German economy.
Connor Campbell, financial analyst at Spreadex, said: “Things got real nasty on Thursday afternoon, with the US stomping into the session with an ugly GDP reading and a power-hungry president.
“Thought it wasn’t exactly a surprise, and came in a smidge better than consensus forecasts, there is arguably no way to greet the news… than with a cliff dive into the red.
“That number – the worst since the 1940s – caused the Dow Jones to fall close to 500 points, leaving the index in danger of sinking under 26000 for the first time in three weeks.”
UK stocks slipped further into the red after the update, having already fallen lower on a raft of negative updates from major firms, including Shell and Lloyds.
The FTSE 100 closed 141.47 points higher at 5,989.99p at the end of trading on Thursday.
The US economic update compounded woes for German investors, who saw stocks tumble after it was revealed that German GDP shrank by 10.1% in the quarter.
The German Dax decreased by 3.65%, while the French Cac moved 2.36% lower.
Meanwhile sterling tipped higher after both the euro and dollar were hammered by the poor economic figures.
The pound rose 0.31% versus the US dollar at 1.303 and was up 0.3% against the euro at 1.105.
In company news, oil giant Shell saw shares plunge after it took a loss in the second quarter following a write-down in the value of the oil in its fields last month.
Earnings attributable to shareholders swung to an 18.4 billion dollars (£14.2 billion) loss in the second quarter of the year, from three billion dollars (£2.3 billion) in the same period last year.
Shares in Royal Dutch Shell slid 68p lower to 1,158.8p as a result.
Lloyds shares fell to an eight-year low after the banking giant took a bigger-than-expected hit that pushed it into a loss.
Chief executive Antonio Horta-Osorio’s bankers revealed that the business had taken a £2.4 billion impairment charge in the second quarter for the loans it thinks might go bad. Shares closed 2.16p lower at 26.2p.
Travel firm Tui slid by 17.1p to 306.5p after it said it will close 166 of its high street stores as part of efforts to slash costs.
The price of oil slumped into the red as the wider bearish sentiment hit the oil market.
The price of a barrel of Brent crude oil decreased by 2.56% to 42.64 US dollars.
The biggest risers on the FTSE 100 were BAE Systems, up 28.1p at 505p, Rentokil, up 9.2p at 557.6p, AstraZeneca, up 136p at 8,751p, and Flutter, up 145p at 11,730p.
The biggest fallers of the day were Lloyds, down 2.16p lower at 26.2p, Standard Chartered, down 26.2p at 394.1p, Legal & General, down 13.7p at 211.2p, and Royal Dutch Shell, down 68p at 1,158.8p.