Hundreds of billions of dollars were wiped off world stock markets on Mondayamid growing panic over the state of China's economy.
More than £70 billion was slashed off the value of Britain's top companies alone, on the worst day of trading since March 2009.
US stocks also crashed within minutes of opening on Wall Street on Tuesdayafternoon - falling 1,000 points, or six per cent, in chaotic early trading which smashed the previous one-day record fall of 777 points.
The stock market panic came after China suffered its worst day of trading in eight years - with shares falling by 8.5 per cent in what the country's official news agency dubbed 'Black Monday.'
More than £3 trillion has now been wiped off global markets since the Chinese government unexpectedly devalued its currency just two weeks ago.
Larry Summers, the former US Treasury Secretary under Bill Clinton, saidMonday's crash could be 'the early stage of a very serious situation.'
Billionaire US presidential hopeful, Donald Trump, meanwhile, warned the crisis could get 'very messy' and warned of a looming depression.
Former Treasury aide under Gordon Brown, Damian McBride, went even further, claiming the crisis would prove to be '20 times worse' than in 2008.
In a series of alarming messages posted on Twitter, Mr McBride said people should assume banks and cash points will be forced to close.
Mr McBride predicted that central banks, like the Bank of England, would be forced to intervene to try to stop the losses. But he said this would only make the 'inescapable crash even worse.'
Speaking in Helsinki, Finland, on Monday afternoon, George Osborne admitted he was 'concerned' about the stock market collapse and admitted Britain would not be 'immune' from the fallout.
However he said the slump in only proved that Britain needed to 'get its house in order.'
"I would take it as a reminder that we are not immune from what happens in the world. It's all the more reason countries like Britain and indeed Finland need to get their own house in order.
"You don't know where the next crisis is coming from, you don't know where the next shock is going to come from in the world.
"Britain is a very open economy, we're probably the most open of the world's largest economies. And so we are affected by what happens; whether it's problems in the eurozone, problems in Asian financial markets.'
The fall in the FTSE marks the 10th consecutive day of falls for the index, which has now dropped to its lowest level since January 2013 as markets continue to be spooked by China's slowing growth.
The FTSE index is now down 17 per cent since its record high in April, falling by 243.8 points, or 3.9 per cent, on Monday alone.
Some traders compared the opening scenes to the Lehman's crash in 2008 and the infamous Wall Street crash in 1929, when a 12.82 per cent fall in the value of the Dow Jones industrial average took place.
Global markets have been rocked in recent weeks by China's slowing economy and the depreciation of its currency, the yuan.
On Wall Street Monday afternoon, the Dow Jones index fell below 16,000 for the first time since February 2014.
In China, the Shanghai stock exchange closed down 8.5 per cent - its worst daily sell-off since 2007.
In London, the FTSE 100 is down 17 per cent since its record high in April, while the oil price has fallen 4.2 per cent to $43.54 - the first time it's dropped below $45 since 2009.
France's CAC40 is down 5.2 per cent, Germany's DAX is down 4.95 per cent and Italy's FTSE MIB is down 4.8 per cent. Not to be out done, Greece's benchmark index the AEX is down 7.4 per cent.
Meanwhile Japan's Nikkei closed with its biggest one-day sell off in more than two years, ending 4.6 per cent lower - the biggest drop since June 2013.
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