The FTSE 100 was down 1.1% at 6,880.81, while the pound was 0.1% firmer against the dollar at 1.1061.
The BoE announced earlier that it has widened its emergency bond-buying programme to include index-linked bonds, which are linked to inflation.
It noted that the start of this week has seen a "further significant repricing" of UK government debt, particularly index-linked gilts. "Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability," it said.
The change will take place with immediate effect until 14 October, alongside the Bank’s existing daily conventional gilt purchase auctions.
"These additional operations will act as a further backstop to restore orderly market conditions by temporarily absorbing selling of index-linked gilts in excess of market intermediation capacity," it said.
The announcement followed another selloff in UK debt markets, particularly in the index-linked market, and came just a day after the BoE said it would double the size of its daily purchases to £10bn.
Russ Mould, investment director at AJ Bell, said the latest move from the BoE "will only serve to worry investors even more".
"So far, its support measures haven’t kept a lid on gilt yields as they have continued to creep up in recent sessions, thereby increasing the cost of borrowing for the government. And today’s news only triggers a very small retreat in yields," he said.
"The Bank of England hopes to avoid a crisis in the market by being a willing buyer of bonds from pension funds who are under pressure. These pension funds will welcome today’s move, but whether the broader market shares the same enthusiasm remains to be seen.
"The key sticking point is that the support measures are only scheduled to last until Friday. Will that be long enough, or will the Bank of England extend the support scheme? Extending it could go one of two ways - the market either applauds the move and breathes a sigh of relief or it gets even more worried, thinking that the extra time suggests the crisis is more severe than originally thought."
Investors were also mulling the latest figures from the Office for National Statistics, which showed the unemployment rate fell in the three months to August to its lowest level since February 1974 as more Britons dropped out of the workforce due to long-term illness.
In addition, the latest BRC-KPMG Retail Sales Monitor revealed that sales volumes continued to fall in September as weakening consumer confidence weighed heavily on spending.
In equity markets, Aviva (LON:AV), Legal & General and Prudential (LON:PRU) all fell after the BoE warned over dysfunction in the government debt market.
PureTech Health slid after it said that it and US-based Nektar Therapeutics had terminated merger talks only four days after they announced a potential tie-up.
Irish convenience food group Greencore lost ground after it said full-year adjusted operating profit and earnings per share were set to be at the lower end of the expected range, partly due to the impact of rail strikes.
Ferrexpo tumbled as the iron ore pellet maker said it had suspended operations in Ukraine after Monday’s Russian missile strikes on the country damaged electrical power infrastructure.
British Gas owner Centrica (LON:CNA) was boosted by an upgrade to ‘buy’ at Citi, while Drax was higher after an upgrade to ‘neutral’ by the same outfit. Both stocks fell sharply on Monday following reports UK ministers are pressing ahead with a renewable energy windfall tax.
B&Q owner Kingfisher (LON:KGF) was in the red after a downgrade to ‘sell’ at Numis.
Market Movers
FTSE 100 (UKX) 6,880.81 -1.13%
FTSE 250 (MCX) 16,970.85 -0.90%
techMARK (TASX) 4,099.48 -0.62%
FTSE 100 - Risers
Rolls-Royce Holdings (LON:RR.) 70.86p 2.86%
Rentokil Initial (LON:RTO) 475.50p 2.24%
Haleon (HLN) 276.25p 1.88%
Centrica (CNA) 70.10p 1.54%
Compass Group (LON:CPG) 1,820.50p 1.53%
Next (NXT) 4,595.00p 1.46%
Convatec Group (CTEC) 209.00p 1.06%
Coca-Cola (NYSE:KO) HBC AG (CDI) (CCH) 1,979.50p 1.05%
Barratt Developments (LON:BDEV) 344.40p 0.79%
International Consolidated Airlines Group (LON:ICAG) SA (CDI) (IAG) 102.50p 0.75%
FTSE 100 - Fallers
Aviva (AV.) 384.00p -4.10%
Antofagasta (LON:ANTO) 1,079.00p -3.92%
Harbour Energy (HBR) 425.90p -3.82%
Croda International (CRDA) 6,466.00p -3.75%
Glencore (LON:GLEN) 475.25p -3.68%
Legal & General Group (LGEN) 216.20p -3.44%
Standard Chartered (LON:STAN) 551.20p -3.26%
Anglo American (LON:AAL) 2,665.50p -3.16%
Prudential (PRU) 893.20p -3.12%
Rio Tinto (LON:RIO) 4,970.00p -2.93%
FTSE 250 - Risers
Wizz Air Holdings (LON:WIZZ) 1,440.50p 4.84%
Mitchells & Butlers (MAB) 112.10p 3.80%
TUI (LON:TUIT) AG Reg Shs (DI) (TUI) 110.70p 2.17%
ASOS (LON:ASOS) (ASC) 547.00p 2.15%
International Distributions Services (IDS) 207.80p 2.01%
easyJet (LON:EZJ) 301.90p 1.99%
Coats Group (LON:COA) 53.20p 1.92%
Watches of Switzerland Group (WOSG) 717.50p 1.70%
Pets at Home Group (PETS) 264.80p 1.53%
Marks & Spencer Group (MKS) 97.92p 1.47%
FTSE 250 - Fallers
Ferrexpo (FXPO) 114.90p -9.53%
Vietnam Enterprise Investments (DI) (VEIL) 567.00p -5.03%
TI Fluid Systems (TIFS) 119.20p -4.18%
PureTech Health (PRTC) 219.00p -4.16%
International Public Partnerships Ltd. (INPP) 140.20p -3.97%
Capital & Counties Properties (CAPC) 100.90p -3.90%
888 Holdings (DI) (LON:888) 91.35p -3.84%
Wood Group (John) (WG.) 120.25p -3.84%
Molten Ventures (GROW) 261.60p -3.75%
Workspace Group (WKP) 358.60p -3.71%
