The FTSE-100 index pulled back further from the 6000 mark, down 18.3 points to 5939.9, as the Plan B put forward by House Speaker John Boehner failed to gather enough support among Republicans to go to a vote.
At a press conference yesterday Mr Boehner said congressional leaders and President Barack Obama must try to move on from the failed tax plan, but there is little time for US President Barack Obama to secure a deal to prevent automatic tax rises and spending cuts coming into force on January 1.
Data that showed US consumers spent and earned more in November failed to cheer investors and the Dow Jones Industrial average also opened lower.
Britain's economic recovery was in the spotlight as gross domestic product figures revealed the third quarter bounce-back was not as strong as first estimated, with growth revised down from 1% to 0.9%.
The pound was down against the US dollar and the euro at 1.61 and 1.22 respectively after it emerged the Government borrowed £17.5 billion in November, up £1.2bn on the same month last year.
Mining stock Evraz led the top flight fallers' board, amid heightened fears the world's largest economy risks being plunged back into recession. It fell 3%, off 9.2p to 257.8p.
Telecoms giant BT also saw share losses after it was fined £95 million for overcharging rivals to use its network. Shares were 2.6p lower at 239.8p.
Banking groups were also hit. Barclays shares were down 3.8p to 263p, with Lloyds Banking Group losing 0.9p to 48.3p.
BAE Systems shares took a hit, despite a £2.5bn deal to sell 20 aircraft to Oman. The contract for 12 Typhoon and eight Hawk aircraft was welcomed by Prime Minister David Cameron but the shares fell 1.9p to 346.1p.
Insurance giant Aviva fell 1.3p to 382.7p despite announcing a £1.1bn deal to offload its US life and pensions arm.
Utility stocks were on the rise after regulator Ofwat announced significant changes to the next price review process in 2014.
Severn Trent was the biggest gainer in the sector, up 41p to 1610p, while South West Water parent Pennon rose 2p to 634p.
Among the biggest FTSE-100 risers were Randgold Resources, up 160p at 6125p, Carnival, up 51p at 2442p, and Polymetal International, ahead 17p at 1176p.
The biggest fallers were Evraz, down 9.2p at 257.8p, Resolution, off 6.8p at 250.1p, Compass, down 19.5p at 723p, and Prudential, off 23.5p at 872p.