The International Monetary Fund on Friday warned that Britain's potential exit from the European Union posed a "significant downside risk" to the economy.
London's benchmark index fell through the 6,000 level yesterday as Brexit fears shook financial markets around the world.
Investors offloaded risky equities in favour of safe-haven assets after the latest referendum polls showed the Leave camp pulling ahead.
Anxiety about the UK's possible exit from the European Union triggered theFTSE 100's steepest daily fall since mid-February, with the blue chip index dropping 121.44 points, or 2.01 per cent, to 5,923.53.
In just four days, more than £98bn has been wiped off the value of Britain's biggest companies.
European bourses also floundered as volatility spiked ahead of next week's referendum. Frankfurt's DAX and the CAC in Paris both fell 1.4 per cent.
Mike van Dulken, of Accendo Markets, said investors are fearful of the "heightened prospect" of a Brexit, which would "worsen an already fragile global growth situation by delivering an economic and political blow to a struggling eurozone".
As stock markets went into freefall, investors sought shelter from the Brexit storm in bonds. UK gilt yields fell to record lows yesterday, while Germany's 10-year bund yield skidded into negative territory for the first time ever. The negative yield means that investors are effectively paying to lend money to the German government for a full decade.
Ant Gillham, of Old Mutual Global Investors, said: "In the short to medium term [after Brexit], I think we're likely to see concern in the market that some of the other European countries might follow suit and that puts break-up risk for the eurozone right back on the table. The natural reaction for investors who are pulling out of peripheral bonds will be to look for safe places to put their money, and we might see UK bond yields fall."
However, he said that yields could increase if a vote to leave starts to further devalue the pound. "Brexit is likely to put real pressure on sterling. Sterling has one of the biggest current account deficits in the developed world, and we are likely to see a lot of downward pressure on sterling, exerting inflation pressure."
Yesterday, sterling slumped to a two-month low against the dollar, dropping by as much as 1 per cent to US$1.4097, while the cost of insuring against volatility in the pound a month into the future soared to its highest level since the height of the 2008 financial crisis.
The Brexit-induced panic selling was also confirmed by a Bank of America Merrill Lynch global fund managers survey which found that investors are sitting on the biggest pile of cash since November 2001. Fund managers are now holding 5.7 per cent of their portfolio in cash it said.
It came as separate research showed more than eight in ten investment professionals are braced for a drop in the London stock market in the six months following a vote to leave the EU, with 39 per cent expecting a "sharp decrease" in the aftermath of a Brexit decision, according to a new poll.
Both UK and non-UK respondents believe that a Brexit vote would have a negative impact on UK asset values on a one-year basis.
In a survey of more than 1,750 investment staff by the industry body CFA UK, more than seven in ten predicted a further depreciation in sterling against global currencies if the UK were to leave the European Union. The cost of insuring against volatility in the pound a month into the future has soared to its higher point since the teeth of the financial crisis in late 2008.
Meanwhile, 71 per cent said they expected UK investment portfolios to suffer in the year following a vote for Brexit, compared to 8 per cent who felt the effect would be positive on portfolios and 17 per cent who thought there would be a minimal impact.
Despite the recent flight to safety that has pushed bond yields to record-setting lows, 69 per cent of investment managers expect UK Government debt to spike compared to the benchmark German sovereign bonds, with more than one in five braced for a surge of more than 20 basis points.
The current yields for the two nations' bonds are near record-breaking lows, with German 10-year bunds tipping into negative yields on Monday.
Will Goodhart, chief executive of CFA UK, said the survey signals that in the event of the UK leaving the union, "those who hold investments in their pensions or elsewhere would be hurt by the decline in the value of their assets".
"Both UK and non-UK respondents believe that a Brexit vote would have a negative impact on UK asset values on a one-year basis. UK respondents feel this more strongly, but it is interesting that qualified investment professionals from around the world - with no emotional involvement in this issue - also strongly believe that a Brexit vote would be against UK clients' interests over that timeframe," he said.
The ratings agency Moody's has said asset managers were unlikely to suffer major disruption to their underlying businesses, despite the possible loss of "passporting" rights to operate throughout the EU by winning regulatory approval in one member state.
