Euphoria surrounding President Barack Obama's re-election fizzled out yesterday as investors' focus switched to the approaching "fiscal cliff" in the US.
The FTSE-100 index lost earlier gains to stand 93.3 points lower at 5791.6 as uncertainty settled in over how the President can avoid the so-called cliff –automatic tax increases and spending cuts that will likely tip the US back into recession.
The split in the US Congress –with the Democrats holding the Senate majority and the Republicans holding the House of Representatives, means reaching a deal to avoid the cliff will be no mean feat for Mr Obama.
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The Dax in Germany and Cac-40 in France followed London into the red as investors also turned their gaze to a vote in the Greek parliament that could ultimately determine the country's future in the eurozone.
The downbeat mood worsened as the European Commission downgraded its economic forecasts for Europe and said the recession would be deeper than feared in 2012.
The Cmmission's report also made for gloomy reading in the UK, warning that Chancellor Chancellor George Osborne will miss a key debt target unless he delivers new measures in his forthcoming mini-budget.
The pound was higher against the euro at 1.25 as nerves around the Greek vote hit the single currency. Sterling was down against the US dollar at 1.59.
In London's top flight, Burberry shares lost hold of earlier gains despite beating City expectations with 6% growth in underlying half-year profits to £173 million.
The fashion house, whose shares dipped 53p to 1199p, was downgraded to hold from buy by brokers Investec as it believes the company has reached the end of its strong run.
Publisher Pearson also lost earlier gains seen after reports suggested it was considering a sale of the Financial Times for as much as £1 billion.
The shares fell 3p to 1237p as it denied rumours it was mulling offers for the publication.
Outside the top flight, FirstGroup shares were 5% lower after it froze its half-year dividend at 7.62p as a result of uncertainty caused by the the West Coast rail franchise fiasco, which has resulted in the Government putting all bids for new franchises on hold while it reviews the process.
The bus and rail operator also reported a 42% fall in under-lying pre-tax profits to £48.7m, but said it was on track with its turnaround plans. The shares fell 10.4p to 194.9p, compared with more than 250p prior to the decision to cancel the bidding.