It was the biggest shock to the Frankfurt-based DAX - a stock market index consisting of 30 major German companies - since 2008, the year of the global financial crisis.
In recent days markets became convinced Britain would vote to stay in the EU and had rallied as a result.
But after the results were confirmed before the opening of the trading floors, the financial index dropped 10 percent before rising slightly later in the morning, meaning an overall 8 percent drop.
“Everyone was in the wrong place,” one trader said. “Nobody was betting on Britain really leaving. Now there is a huge need to safeguard.”
Since the middle of the previous week the DAX had risen 9 percent on hopes that Britain would stay in the EU.
Banks were particularly hard hit. Deutsche Bank and Commerzbank both lost between 15 and 16 percent of their value. Allianz shares dropped by 13 percent.
But energy companies RWE and Eon which both have large investments in the UK were also affected.
“In the stock market you always need to think the unthinkable,” said market expert Daniel Saurenz, adding that traders had failed to do this in recent days.
German government bond prices rose sharply on Friday as money poured in from investors seeking safety after Britain voted to leave the European Union.
This pushed the yield on the benchmark ten-year German government bond into negative territory for only the second time in its history, to -0.14 percent.
Yield differentials across the Eurozone, known as spreads, widened, with yields rising in the currency bloc's weaker southern economies.
The Greek government bond yield rose to 9.4 percent early Friday, traders said.
The Leave campaign won the referendum on Thursday with a vote of 52 percent to 48 percent, according to the BBC.
Voter turnout reached 72 percent with over 30 million people casting their ballots.