The FTSE 100 index closed down 96.05 points, or 1.37%, at 6933.80.
The lack of progress in the talks over Greece's debt crisis rattled investors.
Greece's finance minister Yanis Varoufakis has said his country's financial situation is "terribly urgent" and the crisis could come to a head in a couple of weeks.
David Madden, market analyst at IG, said: "European equity markets are sustaining heavy losses as Athens gives with one hand and takes with another.
"No sooner had Greece got back into traders' good books after making a repayment to the IMF, a comment from Yanis Varoufakis about the country's solvency sparked a new sell-off."
It emerged on Tuesday that Greece had used its emergency reserves at the IMF to make the €750m (£538m) payment.
In Germany, the benchmark Dax share index was down 1.72%, while France's Cac 40 fell 1.06%.
A resumption in the sell-off in global bonds also contributed to the fall on equity markets.
Bonds saw hefty selling last week, a trend partly blamed on rising inflation expectations, sending yields - which move inversely to bond prices - sharply higher.
The yield on German 10-year government bonds rose by 13 basis points to 0.72% on Tuesday. In mid-April the yield had fallen to 0.05%.
Among UK companies, shares in Easyjet fell by more than 9% after the airline warned that the disruption caused by April's air traffic control strike in France would cut profits by £25m.
The news overshadowed the carrier's £7m half-year profit.
On the currency markets, the pound hit a five-month high against the dollar on the back of strong industrial production figures. It rose by 0.6% before easing slightly to stand 0.52% ahead, at $1.5667. The pound dropped 0.2% against the euro to €1.3944.
(Close): UK shares dropped sharply - in line with other European markets - on worries over Greek debt talks and the continued sell-off in the bond market.