London's FTSE-100 Index lost early session gains to stand 28.9 points lower at 5925.4, as investors fretted that President Barack Obama would be unable to secure a deal to avoid a package of automatic spending cuts and tax increases.
The Dow Jones Industrial Average opened sharply lower as Mr Obama called in congressional leaders to gather at the White House for last-ditch negotiations ahead of a New Year's Day deadline.
The pound was up against the dollar at 1.62, amid fears that if a deal cannot be struck, the US could be dragged into recession, according to economists. The pound was also up against the euro at 1.22.
Mr Obama cut short his Hawaiian holiday on Thursday to resume the fiscal cliff talks after US leaders failed to reach agreement before Christmas amid a split over Democrat Party plans to reduce deficit spending by raising taxes for wealthy earners and Republican demands to cut popular benefit programmes.
Joshua Mahony, research analyst at foreign exchange broker Alpari, said it seemed increasingly unlikely that a straightforward solution would ever be reached.
He added that any legislation drawn up now would probably only act as a temporary fix ahead of the January 1 deadline, before more permanent measures could be agreed.
"A decision to delay would no doubt provide sufficient respite to the markets, yet this would be short-lived and in all likeliness simply set up another deadline to which politicians from each side can again play a political game of chicken," he said.
Miners and insurers were among those topping the fallers board, with insurance giant Admiral the biggest FTSE-100 casualty, down 22p to 1176p.
Rival Prudential was down 12p to 865p, with Aviva losing 5p to 375.7p.
Gold and silver producer Polymetal International was off 20p to 1169p, while troubled platinum miner Lonmin was 2.6% lower in the FTSE 250 after confirming that chief executive Ian Farmer has stepped down due to a serious illness.
The group, which was thrown into turmoil amid violent strikes at its South African mine over the summer, has drafted in headhunters to help find a successor to Mr Farmer. Shares fell 7.5p to 278p.
Investors looked to the safety of supermarket stocks amid the wider market falls.