The FTSE 100 closed down 47.68 points, or 0.9 per cent, at 5,302.87 after ending 1.4 per cent higher on Tuesday at 5,350.55 for its highest close in a week.
“For the best part of a month or so now equities have been simply trading through the motions,” Joshua Raymond, market strategist at City Index, said.
“Until heavier trading volumes come back into the market, investors are happy to simply be range trading at this point.”
The index traded just 55 per cent of its average 90-day volume and the market has held in a tight range over the last month, hugging the 5,300 level in holiday-thinned trade.
Economy-sensitive banks were hardest hit as investors withdrew from cyclical stocks. HSBC shed 2.3 per cent.
Bank of England policymakers considered the case for both easing and tightening policy this month, before voting eight to one to keep interest rates at a record low of 0.5 per cent, minutes showed.
US home loan demand climbed last week but record low mortgage rates failed to light a fire in a market constrained by unemployment and tight lending practices.
“Under the surface lies a nagging concern that the Western economies are facing a Japan-style scenario where they lost two decades,” said Jeremy Batstone Carr, head of research at Charles Stanley.
Mining stocks fell after Tuesday’s advance as metal prices waned on doubts about the demand outlook.
BHP Billiton slipped 3.4 per cent after launching a hostile $39bn bid for Canadian fertiliser group Potash.
Eurasian Natural Resources fell 4.3 per cent after the Kazakh miner said it was wary about commodity prices in the second half. It posted a 63 per cent rise in first-half earnings on higher output and prices.
Xstrata bucked the trend, rising 1.1 percent. Traders cited market talk of bid interest from Swiss-based commodity trader Glencore.
Energy stocks retreated in tandem with crude prices CLc1, which fell after an industry report signalled petroleum inventories in top consumer the US were headed for a record.
BP, Royal Dutch Shell and Cairn Energy shed 0.8 to 2.6 per cent.
Anglo American, British American Tobacco, Carnival, Fresnillo, Hammerson, HSBC, Pearson, and Standard Life fell after going ex-dividend.
Diageo fell 1.1 per cent as HSBC cut its rating. On the upside, British satellite firm Inmarsat said US firm LightSquared had activated a co-operation agreement which would deliver payments totalling $337.5m, boosting Inmarsat’s shares 5.6 per cent.