Britain’s leading stock market index has suffered its worst year in a decade as economic worries, Brexit uncertainty and the trade war between the US and China all spooked investors.

The FTSE 100 tumbled by 12.5% during 2018, its biggest annual decline since 2008, wiping out more than £240bn of shareholder value.

The blue-chip index of top UK shares ended the year at 6,728 points, down from 7,687 on the last trading day of 2017. The sell-off has inflicted significant losses on pension funds, major fund managers and small investors alike.

Tobacco stocks were among the worst hit, as US regulators announced a crackdown on flavoured e-cigarettes and menthol cigarettes. British American Tobacco lost half its value during the year.

Shares in major house builders also fell sharply, amid fears that a hard Brexit would cause major economic disruption. Taylor Wimpey dropped by a third during the year and Berkeley Group fell 17%.

The online grocer Ocado defied the gloom, though, almost doubling in value over the last 12 months. It cheered the City in May with a major deal to supply its technology to the US retail giant Kroger.

Other stock markets around the world have also experienced heavy losses, dragging the MSCI All-Country World Index down by 11%, its biggest annual drop since the 2008 financial crisis. Much of the damage was caused during a volatile autumn which hit US stocks hard. Wall Street ended its worst year since 2008, with the Dow Jones closing down 5.6% for the year and the S&P 500 closing down 6.2%.

Some investors are deeply concerned that the US economy could be slowing, even as the country’s central bank raises interest rates despite protests from Donald Trump.

“Markets are torn between recession fears and the hope that it is just another false alarm,” said Holger Schmieding of the German bank Berenberg. “As the saying goes, financial markets tend to predict nine out of five recessions. For economists, it is probably the other way around, though. Economic fundamentals remain mostly positive. What we may have to fear for 2019 is fear itself and the risk of extraordinary political stupidity well beyond the usual mishaps of life.”

President Trump’s trade war against China, and the federal government shutdown triggered by his demands for a border wall with Mexico, are also weighing on markets as they enter the new year.

The US has now imposed tariffs on $250bn (£198bn) of Chinese imports, and Trump has threatening to bring in further levies unless Beijing changes its trade practices before March.

Andrew Milligan, the head of global strategy at Aberdeen Standard Investments, said investors have been surprised by the scale of the trade war.

“There’s a growing realisation that the economic structures that had operated for the large part of the decade after the 2008 crash are altering in ways that could be quite damaging to economies and to companies and therefore to financial markets,” Milligan said.

“With the degree of the trade dispute between America and other countries, it was known on 1 January last year there would be disruption to trade, but I think the extent of it has been worse than people realised.”

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

Elsewhere in global indices, Asia-Pacific stock markets have suffered their biggest annual loss since 2011. China bore the brunt of the rout, with the Shanghai composite index slumping by almost 25% in 2018 – the worst performance by a major index globally.

Australia’s stock market posted its worst year since 2011, falling 7% amid fresh evidence of a tightening credit squeeze at home and growing concern about a weakening global economy.

Brazil’s Bovespa index surged by 15% during the year, though, as investors welcomed far-right candidate Jair Bolsonaro’s rise to the Brazilian presidency and made the Bovespa the best performing major index globally.

The wave of tit-for-tat tariffs imposed by Washington and Beijing have hurt the Chinese economy. Data released on Monday showed that China’s factory sector is now shrinking, for the first time in two years, in a potential sign that the US-China trade dispute is taking its toll and could have greater consequences at the start of 2019.

Investors did take comfort from Trump, who tweeted on Saturday that he was making “big progress” in talks with President Xi Jinping. This helped ignite a small New Year’s Eve rally on Wall Street, with stocks up about 1% in early trading.

Milligan believes “a degree of uncertainty and worry” could be lifted from the markets if Trump and Xi reach agreements to resolve the US-China trade dispute before even more tariffs are imposed.