The FTSE was down 118.39 points, or 1.7 percent, at 6,773.04 by the close, and is up 3.2 percent this year.
Consumer staple stocks were responsible for nearly 25 points of the blue-chip FTSE 100's losses. Imperial Tobacco fell 3.4 percent and British American Tobacco 2.9 percent on fears that a merger of U.S. peers Reynolds and Lorillard might fall through.
Imperial would acquire assets from Reynolds if the deal happens. BAT has a stake in Reynolds.
Imperial Tobacco hit record highs this month and is up 13 percent since the deal was announced.
"The possibility of regulatory intervention to this deal is affecting the sector, and makes the outlook more cautious," IG market analyst, Chris Beauchamp, said.
Traders said bets on a U.S. interest rate hike, which helped the dollar towards its biggest quarterly rise since 2008, were also weighing on high dividend payers such as consumer staples.
Mining, oil and other commodity-related stocks took nearly 35 points off the index, as commodity prices were pressured by a stronger dollar.
Despite its quarterly rise, the FTSE has lagged its euro zone counterparts, which were boosted by European Central Bank stimulus measures and are less exposed to commodity stocks.
The index was nevertheless supported by shares in Kingfisher, Europe's biggest home improvement retailer, which rose 4.3 percent to be the top FTSE 100 riser.
It said it would close about 60 underperforming stores in Britain while returning 200 million pounds to investors during the 2015-16 year.
Chief Executive Veronique Laury has been charged with turning the firm around. "How it will work out looks unclear and is certainly likely to take quite a long time," Banco Espirito Santo analysts said, retaining a "sell" rating on the stock.
(Editing by Louise Ireland)
By Alistair Smout
