Fears that interest rates will rise sooner than expected sent the FTSE 100 Index into the red after unemployment fell within touching distance of the Bank of England's 7% target.
Official figures showing joblessness had fallen more sharply than expected to 7.1% unnerved traders as it fuelled speculation the threshold set out under the Bank's forward guidance policy could be hit imminently.
Despite the Bank's assurances that reaching the threshold is not an automatic trigger to raise rates from 0.5%, market worries saw the FTSE 100 lose early session gains to close 7.9 points lower at 6826.3.
The Dow Jones Industrial Average on Wall Street was also in negative territory at the time of the close in London, with lower-than-expected revenues from computer giant IBM.
In London, sentiment was also hit by the prospect of Bank policymakers unwinding their monetary stimulus drive as the economy recovers.
Minutes from the latest meeting of the Monetary Policy Committee suggested the Bank was in no hurry to raise rates even if the threshold was met soon and assured any future hikes would only be made gradually to protect the recovery.
But the possibility of interest rates rising sooner than expected boosted the pound, which climbed a cent to nearly 1.66 US dollars, closing in on a two-and-a-half year high reached earlier this month.
Sterling also rose by a cent against the single currency to 1.22 euros, building on a one-year high.
In the FTSE 100, Royal Bank of Scotland was one of the session's biggest fallers, declining 3% or 11p to 348p after a ratings downgrade from broker UBS.
It suggested shares in the taxpayer-backed bank were overpriced despite the likelihood of progress over the next 18 months.
Retail payments and accountancy software firm Sage led the risers after it said it was on course to meet next year's target for 6% organic revenues growth.
Shares were up 3% or 13.8p at 426.9p.
Outside the top flight, shares in WH Smith rose 27p to 1043p after its continued squeeze on costs ensured another "good profits performance" in the 20 weeks to January 18, despite same-store sales falling by 4%.
Investec's Kate Calvert said: "Consistency is the hallmark of WH Smith and management has again delivered."
Pub chain JD Wetherspoon rose 20p to 809p as it revealed a 6.7% lift in underlying sales for the 12 weeks to January 19.
The biggest FTSE 100 risers were Sage up 13.8p to 426.9p, Admiral ahead 45p at 1460p, Johnson Matthey 85p stronger at 3440p and easyJet 33p higher at 1743p.
The biggest FTSE 100 fallers were William Hill down 13.8p to 341.6p, Royal Bank of Scotland off 11p at 348p, Mondi 24p lower at 969p and Fresnillo 18p weaker at 754.5p.