The blue-chip FTSE 100 sank 3.4% to a two-week low, with British Airways-owner IAG plunging 12.1% on news that Prime Minister Boris Johnson was pondering a second national lockdown to contain a surge in COVID-19 cases.

An index of travel and leisure stocks <.FTNMX5750>, already among the biggest decliners this year, tumbled 5.2%. The mid-cap FTSE 250 fell 4% to a seven-week low, with pub operators plunging on the possibility of new restrictions.

"Even if (the lockdowns) aren't as severe as those introduced in March, (they) will have a big economic impact," said Russ Mould, investment director at AJ Bell.

J.P. Morgan Asset Management's global market strategist, Mike Bell said the government's furlough scheme, or something similar, will have to be extended to prevent a significant rise in unemployment.

A rally in UK stock markets has petered out this month as the spread of the novel coronavirus threatens a nascent business recovery, with banking stocks taking a further hit from the Bank of England's announcement that it was looking at negative interest rates.

The FTSE banking index <.FTNMX8350> fell another 5.3% on Monday after media reports said lenders including Barclays, HSBC and Standard Chartered moved large sums of allegedly illicit funds over nearly two decades despite red flags about the origins of the money.

HSBC, already trading at decade lows, slid 5.3%, while StanChart dropped nearly 6% to its lowest since 1998. Barclays tumbled 5.4%.

Aero-engine maker Rolls-Royce plunged 10.8% to its lowest since 2004 after it confirmed it was considering a rights issue of up to 2.5 billion pounds.

By Shashank Nayar and Susan Mathew