The FTSE 100 suffered its sharpest on-day fall since last July amid pressure from worries over stability in the Middle East and wage pressures.
The Office for National Statistics (ONS) said the jobless rate jumped to 4.2% in the three months to February – the highest level for nearly six months – and showed higher-than-expected regular wage growth, excluding bonuses, at 6%.
Global markets were also uneasy in the face of recent attacks in the Middle East.
London’s top index closed 145.17 points, or 1.82%, higher to end the day at 7,820.36 as a result.
AJ Bell, head of financial analysis Danni Hewson said: “The FTSE 100 slumped amid concerns about escalation in the Middle East and higher than expected wage growth.
“Despite the labour market cooling, pay inflation remains relatively stubborn and this will concern the Bank of England as it could be a sign of a rising price environment becoming more entrenched.”
Elsewhere in Europe, the German Dax index was down 1.57% at the close and the Cac 40 in France closed down 1.4%.
Across the Atlantic, the US markets were one of few to record a positive start to trading, with the Dow Jones edging higher after positive updates from companies such as UnitedHealth Group.
Meanwhile, sterling was also down amid concerns over the cooling labour market due to the higher unemployment rate.
The pound was down 0.14% at 1.242 US dollars and was 0.1% lower at 1.169 euros at market close in London.
In company news, Dr Martens shares were on a weak footing after the boot maker warned over profits and confirmed its boss will step down later this year.
The Camden-based company said its struggles in the US continued into the new financial year, with US wholesale revenues due to be down by double-digits year-on-year.
As a result, it said its profits could drop to a third of levels from the previous year. Shares fell by 27.95p to 67p.
Recruiters Robert Walters and Hays both finished in the red after both firms flagged that tough conditions have persisted in the jobs market.
Robert Walters said its gross profit dropped by 16% to £81 million in the three months to the end of March, compared with the previous year.
Meanwhile, Hays, which specialises in placing white-collar roles, said its group fees dropped by 14% in the three months to the end of March, on a like-for-like basis compared with the previous year.
Robert Walters shares finished 19p lower at 371p. Hays was down 4p to 88.5p.
Paper and packaging firm DS Smith slipped after it agreed a £5.8 billion takeover by Memphis-based International Paper, bringing to an end a potential bidding war for the firm. Shares dipped by 16.2p to 393.4p.
A barrel of Brent crude oil was up by 0.3% to 90.13 US dollars as markets were closing in London.
The only four risers on the FTSE 100 were Croda International, up 61p at 4,830p, Smith & Nephew, up 3.4p at 962p, Centrica, up 0.45p at 130.95p, and Flutter, up 15p at 15,000.
The biggest fallers on the FTSE 100 were Ocado, down 21p to 342.9p, Phoenix Group, down 23.7p to 484.8p, Standard Chartered, down 29.6p to 635.2p, DS Smith, down 16.2p to 393.4p, and Beazley, down 26p to 647.5p.