US Republican lawmakers have rejected party leader John Boehner's proposal in the fiscal cliff talks, leading to fears that $600bn (£369.1bn) worth of tax hikes and spending cuts that could drag the US economy back into recession. Politicans have to agree the fiscal rules by 1 January.
Headline resources and financial shares suffered. Eurasian Natural Resources and Evraz led the FTSE 100 down, sinking 3.06 per cent and 2.81 per cent respectively.
UK banking shares had a mostly poor showing. HSBC fell 0.88 per cent, RBS sank 1.38 per cent and Barclays fell 2.23 per cent. Only Lloyds Banking Group was up, by 0.93 per cent.
Electrical retailer Darty fell 5.4 per cent in early trading, while oil and gas explorer Soco International dropped 2.84 per cent on the FTSE All-Share.
Utilities stocks were top of the pile this morning, with Pennon Group, United Utilities and Severn Trent adding 2.04 per cent, 1.56 per cent and 1.21 per cent respectively. Defensive stock Tesco also rose on the FTSE 100, adding 0.18 per cent.
On the wider index, the risers were a mixed bag. Airline Flybe and steelmaker Severfield were up by 6.12 and 4.45 per cent respectively.
Overseas indices fell overnight. In Japan, the Nikkei closed down 0.99 per cent, Hong Kong's Hang Seng was off by 0.68 per cent while in the US the Dow Jones closed 0.45 per cent up.