European and British shares suffered their biggest one-day falls since the start of the Gulf War after explosions across London triggered sharp sell-offs across financial markets.
The leisure, transport and insurance sectors were hit hardest as investors were rattled by the increased terrorism risk.
The pound tumbled to an 18-month low against the dollar and had its biggest drop in almost 17 months against the euro. Oil prices also slumped by around $2 barrel on worries that the attack might dampen economic conditions and demand for crude.
At the same time, there was a rush by investors into safe haven assets like bonds, gold and the Swiss franc.
However, by midday, equity markets had rallied from the worst lows of the day on relief that the attacks were not worse.
Strategists also pointed out that the longer-term impact of the blasts may be muted, pointing to rebound in European shares following the Madrid terrorist attacks last March after an initial sell-off.
In equity markets, the FTSE 100 was 1.97 per cent lower at midday or 102 points to 5,126.7. The FTSE 100 had been down as much as 160 points or 3 per cent at 5,069.22 in its biggest one day fall since March 12, 2003 at the start of the Gulf War when the market benchmark tumbled 4.8 per cent.
On the UK market, the leisure and hotels sector suffered the greatest fall but shares had rallied sharply from intra-day lows at midday. The slide was led by drops in cruise operator Carnival (down 3.19 per cent), Diageo (down 4.35 per cent), Hilton (down 2.35 per cent) and British Airways (2.66 per cent).
The FTSE Eurofirst 300 Index of leading European shares fell 2.46 or 28.46pts per cent to 1128.66. Earlier in the day it had touched a low of 1107.49.
On bond markets, yields dropped as traders speculated the terrorist attacks would increased the likelihood of cuts in European and UK interest rates while possible slowing further tightening of monetary policy in the US.
The yield on the benchmark 10-year UK gilt slid 13 basis points, or 0.13 percentage points, to 4.16 per cent. It had fallen as low as 4.12 per cent earlier today, the lowest in more than two years.
Ten-year US treasuries fell below the pyschologically-important 4 per cent mark, down 7.5bps to 3.99 per cent while 10-year bunds fell to a record low of 3.08 before rising back to 3.14 per cent, down 7.3bps.