The FTSE 100 saw volatile trading with low volumes as investors anxiously watched for signs of a breakthrough between Democrats and Republicans over the US’ national debt ceiling.
The parties are at loggerheads and have just days left to pass a package of spending cuts and tax rises they both agree on, after which the $14.3 trillion (£8.8 trillion) debt ceiling can be lifted.
“US markets and the FTSE 100 swung between losses of 0.5 per cent and flat territory on Monday as investors continued to position themselves for a potentially volatile next 48 hours,” said City Index equity analyst Sean Power.
Europe’s debt fears also returned following a few days of relief after Greece’s second rescue deal was signed.
Banking stocks fell across Europe, with Italy’s biggest bank Intesa Sanpaulo down eight per cent at the close, after rating agency Moody’s decided to rate the Greek deal a default.
The FTSE 100 closed down 0.2 per cent at 5,925.26 as financial stocks slumped across the board.
Barclays fell most to close 4.4 per cent down, followed by Lloyds 4.3 per cent lower.
Insurance stocks also dropped: composite insurance giant Avivia was off three per cent at the close while life consolidator Resolution was 2.3 per cent down.
Car insurer Admiral closed two per cent down while Standard Life ended down 1.6 per cent.
Wealth manager Hargreaves Lansdown was not spared either, falling 2.1 per cent; while RBS ended 1.6 per cent off.
Cairn Energy was the only non-financial stock among the biggest fallers on the index – it was off 1.6 per cent at the close as its bid to sell Indian energy assets to Vedanta Resources rumbled on.
Among the risers were precious metals miners Fresnillo, which benefited from a surge in prices as investors raced to safe haven assets.
Gold prices hit a new all-time record high of $1,622 today, while Fresnillo closed up 2.3 per cent.
Defensive stocks were also favoured, with water supplier United Utilities up 1.7 per cent; pharma giant GlaxoSmithKline up 1.7 per cent and engineer Weir Group 2.5 per cent higher.
Household goods maker Reckitt Benckiser gained 1.4 per cent after reporting strong interim results, while design house Burberry gained the same.
“Broker comment has had a significant effect on one particular share in the retail sector with luxury retailer Burberry making gains after UBS hiked its price target for the shares,” said CMC Markets analyst Michael Hewson.
Among smaller caps, Dixons fell 6.1 per cent after a downbeat broker assessment, also from UBS.
“Dixon’s share price has been in a consolidation pattern for the past month and today’s losses pushes its share price closer to testing near term support levels of 15p,” said Power.
US markets also ended lower with a lack of economic data giving stocks little upward momentum.
Banks again led the fallers, with Bank of America and JP Morgan each off by 1.2 per cent.
Sentiment was also hampered by news that Blackberry maker Research in Motion is to cut more than ten per cent of its global workforce as it struggles to retain its competitive edge.
Its shares closed 4.5 per cent down.