The People's Bank of China set a weaker midpoint for the yuan, and a private survey showed that activity in China's services sector expanded at its slowest rate for 17 months in December.

The blue-chip FTSE 100 index <.FTSE> closed down 1 percent at 6,073.38 points, leaving the FTSE some 15 percent below a record high reached last April.

The FTSE 350 Mining Index <.FTNMX1770> declined 3.7 percent, with Anglo American (>> Anglo American plc), BHP Billiton (>> BHP Billiton plc), Rio Tinto (>> Rio Tinto plc) and Glencore (>> Glencore PLC) all falling sharply.

"We are in a new world - China's not growing (in) double digits, demand for raw materials has fallen through the floor and it's both a supply and demand side problem," Accendo Markets head of research, Mike van Dulken, said.

Energy shares such as BP (>> BP plc) and Royal Dutch Shell also fell as the price of oil dropped to an 11-year low on concerns over growing supply and rising stock levels. [O/R]

Chipmaker ARM (>> ARM Holdings plc) retreated 3 percent after Nikkei reported that Apple (>> Apple Inc.) is expected to cut production of its iPhone 6S and 6S plus models by about 30 percent in the January to March quarter.

Nervousness among investors also rose after North Korea said it had successfully tested a miniaturised hydrogen nuclear device on Wednesday, stoking geopolitical tensions.

"The events in North Korea have only added to further downward pressure, with the words 'nuclear explosion' and markets never mixing too well together,” GKFX chief market analyst, James Hughes, said.

However, those concerns lifted shares in some defence companies, including BAE Systems (>> BAE Systems plc), which was the best-performing FTSE 100 stock. BAE, which rose 3.8 percent, got a further boost after RBC analysts tipped the stock.

Royal Mail (>> Royal Mail PLC) was also a standout gainer, climbing 1.3 percent after Barclays upgraded its price target.

(Additional reporting by Sudip Kar-Gupta; Editing by Louise Ireland)

By Kit Rees