Global stock markets posted their steepest falls since the 2008 financial crisis on Monday after a crash in the oil price amplified concerns about the escalating economic cost of the coronavirus outbreak.

Almost £125bn was wiped off the value of the FTSE 100 in the fifth-worst day in history for the index of leading UK company shares, as it plummeted by 7.7% to finish the day below 6,000 points, its lowest level since straight after the Brexit vote in 2016.

In Italy the prime minister, Giuseppe Conte, extended the red zone restrictions in the north to the whole country, banning all public gatherings and preventing movement other than for work and emergencies.

Trading on Wall Street was frozen within minutes of the market opening as the system to buy and sell shares failed to keep pace with events. The Dow Jones closed down by more than 2,000 points for the first time ever, a decline of 7.8%.

On a day of escalating economic losses as countries scrambled to respond to the outbreak, developments included:

The number of deaths in the UK rose from three to five after victims were confirmed in Wolverhampton and Sutton, south London. Both were in their 70s and had underlying health conditions.

A scramble to bring home hundreds of British tourists from Italy was under way, as the Foreign Office advised against all but essential travel to the country.

Seven Britons tested positive after flying from London to Vietnam alongside an infected 26-year-old woman who had recently travelled to Milan and Paris.

England’s chief medical officer said people with symptoms as minor as coughs and colds could be asked to self-isolate within the next two weeks.

Germany and the Republic of Ireland announced emergency funding packages worth billions of euros, with Berlin declaring that it would do “everything needed to stabilise the economy and secure jobs”.

Some of Britain’s biggest companies plunged in value by billions of pounds, with oil stocks recording the most severe losses. BP crashed in value by almost 20% and Shell tumbled by 18%. In the US, Chevron lost 14% and France’s Total declined by 17% in sustained global selling pressure. Smaller oil companies on Britain’s FTSE 250 index were hit even harder.

Stock markets fell across Europe with losses in France, Germany and Spain of about 8%, outstripping the depths of the eurozone sovereign debt crisis. The biggest sell-off came in Italy, with stocks in Milan collapsing by more than 11%.

The global stock market correction – of a scale last seen in the weeks after Lehman Brothers’ collapse in 2008, which triggered the worst global recession since the Great Depression of the 1930s – comes amid an increasingly bitter standoff between Saudi Arabia and Russia over oil production cuts as the coronavirus outbreak drags down international demand for crude.

On Sunday Russia refused to sanction cuts to production that would have supported the oil price. Saudi Arabia retaliated by pledging to increase production, which sent the oil price crashing on Monday morning with the steepest percentage decline since the onset of the first Gulf War.

The price of a barrel of oil collapsed by more than 30% at one point, tumbling to about $35 (£26.70) to unleash a wave of sustained and heavy selling pressure throughout other financial markets around the world.

Traders drew parallels with Black Monday in 1987, when stocks crashed around the world, saying that stock dealing rooms had accelerated from “panic mode into pure hysteria” faced by the twin threats of the coronavirus and the oil price war.

The Vix volatility index, known as Wall Street’s fear gauge, which measures expected future extreme moves in financial markets, spiked to the highest levels since the 2008 crash. “It’s widely assumed it will get worse before it gets better,” one trader said.

Ayush Ansal, of investment firm Crimson Black Capital, said: “Markets were at breaking point before Saudi Arabia’s decision to launch an oil price war, but this latest development has taken them beyond that.”

Investors rushed to buy assets considered as safe havens during times of market turmoil – including UK, US and German government bonds – sinking borrowing costs to among the lowest levels on record.

The price of 10-year US Treasury bonds rallied the most in more than a decade, while the yield – which moves in the opposite direction of prices – on 30-year US Treasury bonds fell below 1% for the first time.

The cost to the UK government to borrow over a two-year period briefly turned negative for the first time – meaning investors are forced to pay to own these bonds. The price of gold climbed to its highest level since 2013.

In the face of the financial-market meltdown, pressure is growing on the Bank of England and the European Central Bank to slash interest rates from as early as this week alongside other measures to support the increasingly fragile UK and EU economies.

The US Federal Reserve issued its first emergency rate cut since the 2008 crash last week, although economists said further cuts, possibly close to zero from the current level of 1-1.25% could be required to shore up confidence as fears mount for global growth.

In Britain, the chancellor, Rishi Sunak, is expected to use Wednesday’s budget as a de facto emergency statement to unveil a sweeping package of critical tax and spending measures to protect companies and families.

However, analysts warned that the lack of a coordinated international response as countries retreat into protectionist policymaking could threaten to unsettle global markets further, while dramatically raising the chances of a global recession this year.

Neil Shearing, group chief economist at the consultancy Capital Economics, said: “The most likely worst-case scenario today is a sharp but probably short recession rather than an outright depression … [but] as the virus spreads, there’s a good chance that that ‘worst case’ scenario quickly becomes the most likely scenario.”

In a silver lining, observers said the world’s biggest banks are better prepared to continue lending to families and businesses despite the sharp moves in financial markets. Pockets of risk still exist, however, including heavily indebted US shale energy companies that could be forced out of business by the oil price collapse.

BlackRock, the world’s biggest investment management company, said: “Market moves have been reminiscent of the financial crisis. But we don’t think it’s 2008, as the economy and financial system are on much stronger footing.”