Deadlock over President Barack Obama's healthcare reform has stalled a temporary funding bill, forcing around 800,000 federal workers into unpaid leave and seeing all but non-essential government activities suspended.
But investors were betting on an imminent deal and limited impact on the US economy, helping markets steady after the previous session's steep losses, with the FTSE-100 Index closing just 2.2 points lower at 6460.
Bourses in Frankfurt and Paris were both up by more than 1%.
The weakening greenback left the pound at a year-long high of 1.62 against the US dollar, while sterling also advanced against the euro to 1.20.
The price of oil was also hit by volatility, falling below $102 a barrel in New York at one stage as the partial government shutdown threatened to slow the economy and reduce demand in the world's largest oil consumer.
Joe Rundle, head of trading at ETX Capital, said traders were more positive over the outlook of US political negotiations and the possibility that the shutdown will boost chances of the US Federal Reserve further pushing back plans to taper its massive economic stimulus drive, potentially until after 2013.
He said: "The risk tone improves somewhat as investors take the view that a partial shutdown, if resolved quickly, will do little damage to the overall health of the US economy."
Further FTSE-100 progress was held back by falls from consumer goods giant Unilever, as well as a weaker-than-expected manufacturing survey.
The CIPS/Markit manufacturing purchasing managers' index survey recorded a level of 56.7 in September, down on August's recent peak of 57.1 and below City expectations for 57.3.
In corporate news, shares in Flora and Magnum-maker Unilever fell by 3.4% after its surprise warning that trading in emerging markets has been disappointing over the last three months.
While the Anglo-Dutch firm said it remained on track to hit its targets for this year, shares fell 82p to 2358p.
Consumer goods peers such as Reckitt Benckiser were also hit, down 57p to 4463p, with drinks companies SABMiller and Diageo likewise suffering, off 88.5p to 3055p and 8.5p to 1956.5p respectively.
Building supplies firm Wolseley rose 3% or 99p to 3296p after it reported a rise in full-year profits and underlying revenues and said it would return £300 million to shareholders through a special dividend.
A new logo and slogan overhaul at Thomas Cook failed to inspire its shares, down 1.8p to 151.6p. The FTSE 250-listed holiday firm will roll out a "sunny heart" logo across all its websites, high street shops and planes as part of a major brand overhaul.