Worldwide share prices have continued to fall following Tuesday's heavy losses, although the key US Dow Jones index showed some signs of recovery.
The markets were surprised by the speed and size of recent declines
Markets across Europe and Asia remained deep in the red, triggered by 9% losses in Shanghai the previous day.
London's FTSE 100 index closed down 114.6 points, or 1.8%, at 6,171.5.
However the Dow, which closed down 416 points - or 3.3% - on Tuesday, clawed back 52.39 points, or 0.43%, to end the day at 12,268.63.
News of a slump in sales of new US homes, and a downgrading of estimates of US growth, failed to dent the Dow, which earlier in the day rose by as much as 137 points before falling back.
The White House refused to comment on events on US and global stock markets, but a spokesman said "the fundamentals are very strong".
Federal Reserve chairman Ben Bernanke added that Tuesday's stocks slide had not changed the Fed's outlook for moderate US growth.
In Europe, France's Cac 40 index dropped by 1.3% and Germany's Dax lost 1.5%.
Too high, too fast
Earlier, markets in Asia, Australia and India had all suffered substantial losses. Investors are questioning the outlook for economic and earnings growth.
The current global stock sell-off was fuelled by speculation that China's government would try to clamp down on illegal share trading and might impose a capital gains tax on stock market earnings.
Stock prices and indexes had climbed to record levels in a number of key world markets, prompting some analysts to fear that shares may have gone too high, too fast.
In Japan, the Nikkei 225 share index closed down 515.8, or 2.9%, lower at 17,604.1, while in Hong Kong the Hang Seng index fell 496.36, or 2.5%, to 19,716.5.
The question facing many investors is how far and how long the fall in prices will last and whether or not the bull run that has driven stocks and indexes higher has now broken.
"I see it as a correction within a bull market," said James Hong, head of equity derivatives trading at Dresdner Kleinwort.
"We were looking for some sort of correction overall. It is a little bit surprising to have it all happen at the same time."
Even if a market's upwards trend is not broken, a market correction can still be significant, analysts said.
In May last year, the UK's FTSE 100 lost more than 9% as concerns about high oil prices and political global instability combined to impact on world markets.
China has been one of the main emerging markets for many investors, and its main stock index had more than doubled in value during the past year.
Stock markets have recovered strongly over the past four years
At the same time, key indexes in Asia such as Japan's Nikkei 225 were pushing to their highest levels in seven years.
Some analysts fear the fall in share prices may last a number of weeks rather than days.
"This sort of move by the market is a little worrying, and it looks like it has been caused by a build-up of concerns in recent days," said Angus Campbell, a trader at Finspreads.
"Memories of last May's correction have sent shivers through investors' spines as many market participants have used futures contracts to run for cover."
The worries hammered China's Shanghai index by nearly 9% on Tuesday, giving it its worst day in a decade.
The China wobble rippled out across Europe on Tuesday, and hit the US later in the day where it coupled with disappointing economic figures to push the Dow Jones 3.3% lower by the close of trading.
Asian markets picked up on this negative sentiment, and India's Sensex fell more than 3.8% on Wednesday.
Australia's main stock index shed as much as 3.5% and at one point was trading at a five-week low, before closing down 2.7%.
Despite the declines, by lunchtime on Wednesday there were signs of a recovery in the US markets and stock futures indicated that the key indexes would open higher.
A lot will depend on the strength of the US economic figures due out later today, analysts said.
"The shocks of the market correction set off by China are still being felt around the world as the hangover continues to dampen investor mood," said Matthew Bristow of Pacific Continental Securities.
"This will mean that investors will be more critical of economic data as the current state of the economy is still of uncertainty and the perfect storm caused panic within the markets," he added.