The FTSE 100 Index closed 3.5 points lower at 5866.8 after strong gains yesterday as worries over a lack of progress to resolve the US budget crisis returned to the fore.
Sentiment was also hit after figures revealed the unemployment rate across the eurozone hit a new record high - at 11.7% - while European Central Bank president Mario Draghi also warned the euro would not emerge from its crisis until the second half of 2013.
There was some good news from the embattled eurozone as German lawmakers gave overwhelming backing to a Greek rescue package, which will see the country's debt trimmed and pave the way for 44 billion euros (£35.7 billion) in emergency loans.
But the pound fell on the US budget talk fears, falling to 1.60 US dollars and 1.23 euros.
In a quiet day for corporate news, taxpayer-backed Royal Bank of Scotland was on the fallers board after its 95 million US dollars (£59 million) deal to sell its Indian banking operations to HSBC fell through.
RBS will start to wind-down the business after the deal was scrapped, which comes after its £1.65 billion sale of 316 RBS branches to Santander collapsed last month.
Shares in the bank fell 3.8p to 295.2p, but HSBC closed 6.1p higher at 637.7p.
B&Q owner Kingfisher was another stock suffering falls, down 1p to 278p after brokers at UBS downgraded the group from buy to neutral following yesterday's results.
The group revealed broadly flat retail profit for the third quarter at £257 million, excluding the effect of currency fluctuations, while like-for-like sales at DIY chain B&Q in the UK and Ireland dropped by a worse-than-expected 4%.
Outside the top flight, gaming firm Sportingbet fell more than 3% after it said a lack of sport fixtures had triggered a drop in first-quarter revenues.
The group, which is the target of a takeover bid by Britain's biggest bookmaker William Hill, posted a 35% drop in revenue to £38.8 million between August 1 and October 31, leaving shares 1.5p lower at 44.5p.
Recruitment firm Harvey Nash was 2% higher after it said it had performed ahead of expectations with gross profits up 5% after a 10% leap in revenues between August 1 and November 29.
The group said the growth of its IT outsourcing business in Vietnam helped it to offset a 4% decline in permanent recruitment in the UK and Ireland. Shares rose 1p to 57p.
The biggest FTSE 100 risers were Arm Holdings up 11.5p to 774p, Aberdeen Asset Management ahead 4.8p to 338p, IMI 14p higher at 1054p and Polymetal International up 14p to 1062p.
The biggest FTSE 100 fallers were Burberry Group down 30p to 1287p, Anglo American off 31.5p to 1732.5p, United Utilities 12p lower at 681.5p and Eurasian Natural Resources down 4.6p to 270.2p.