Congress must agree to raise the limit on how much debt the US can have by the end of February, otherwise the country risks default and could be slapped with damaging credit downgrades.

Wall Street closed higher on Friday but was shut yesterday for a public holiday.

The pound was down against the US dollar and the euro at 1.58 and 1.18 respectively, in anticipation of a raft of poor UK data this week.

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Experts predict public finances will continue to deteriorate and GDP figures on Friday are expected to show the economy contracted in the final three months of 2012.

America's spending squeeze was highlighted by Financial Times, Penguin and text books publisher Pearson as it faces up to the continued impact of cuts by US schools on books, software and other learning material.

Pearson said market conditions remained weak over the key fourth-quarter selling season in higher education, consumer publishing and corporate advertising and that the headwinds were likely to persist in the opening months of this year. Shares fell 3%, or 36p, to 1202p.

Other fallers included fashion house Burberry, which slipped 19p to 1367p, and global drinks giant Diageo after a decline of 23.5p to 1819.5p.

The biggest riser in the top flight was car insurer Admiral after Goldman Sachs upgraded its target price for the stock and said there was the potential for claims inflation to decline faster than the market currently expects. Shares were 57p higher at 1211p, a rise of 5%.

Royal Bank of Scotland shares were 8.1p stronger at 366.9p as investors digested a report that its investment banking arm will be broken up into two parts – a markets business and an international banking arm. In contrast, Lloyds Banking Group was down 0.2p to 53.2p.

Outside the top flight, shares in grocery delivery group Ocado continued to benefit from last week's better-than-expected trading update with a further rise of 8p to 95.1p. WH Smith, which is due to post figures later this week, was 30.5p higher at 646p.

The biggest FTSE-100 risers were Admiral, Aviva, Weir Group, 44p higher at 1950p, and Royal Bank of Scotland.

The biggest FTSE-100 fallers were Pearson, Meggitt, off 7.8p to 429.4p, Kingfisher, 4p lower at 268.9p and Burberry.

European shares also rose yesterday, climbing back towards near two-year highs, as investors bought back into relatively "undervalued" sectors such as utilities and mining.

Gains were limited, however, as worrying comments from Swiss watch-maker Richemont about sales growth in China sparked a sell-off in luxury stocks, with Richemont losing 5.6% and Louis Vuitton owner LVMH falling 1.3%.

The FTSEurofirst 300 index of top European shares provisionally ended 0.2% higher at 1166.26, just a few points shy of a near two-year high of 1170.29 reached on January 10.

Shares of utilities and basic resources companies – which were among the worst performers in Europe in 2012 – led the gainers yesterday, with ArcelorMittal surging 4% and E.ON climbing 1.6%.

"Investors are switching to the 'value' stocks," one Paris trader said.