The banking sector put the brakes on potential gains on the FTSE 100 in early trading after poor results from Lloyds.
The index was expected to be given new impetus today as hopes of a new package to breathe life into the US economy encouraged investors elsewhere.
Former Federal Reserve vice chairman Donald Kohn said the Fed could consider a new round of stimulus to help the economy, lifting Wall Street late in trading yesterday.
With economic data highlighting the fragility of the economic recovery, particularly in the US and Europe, investors have been shunning riskier stocks and piling into 'safe havens' like gold.
The sovereign debt crisis has also sapped confidence with Italy and Spain in dire straits on the bond markets.
The FTSE 100's biggest faller was satellite equipment company Inmarsat which plunged by more than 17 per cent — dragged down after the company said it had abandoned its forecast on growth.
In the banking sector Lloyds dropped five per cent after it announced that it had moved into the red as a result of payouts in connection with the insurance mis-selling scandal. RBS was down three per cent while Barclays also dropped.
Rio Tinto was down 1.3 per cent despite reporting a rise in profits in the first half. Vedanta, also in the mining sector, lost 1.1 per cent.
Leading the FTSE 100 climbers was consumer giant Unilever which reported strong sales growth and profits boosted by cost cutting.
Miner Randgold Resources was up 4.5 per cent.
Insurer Aviva was up more than three per cent after it announced a profit rise to the market.
On the UK economic front the Bank of England was expected to announce the freezing of interest rates for another month.
Meanwhile the Society of Motor Manufacturers released figures which showed that new registrations were down 3.5 per cent in July compared with the same month last year as the consumer climate remains weak.
Across the Atlantic later weekly US jobless claims data comes under scrutiny ahead of tomorrow's key non-farm payrolls report.