London's premier index retreated from record heights during the first trading session of the New Year in response to a sluggish performance from blue-chip energy stocks.

The FTSE 100 Index closed down 39.67 points to 7,648.1, with oil majors BP and Royal Dutch Shell B enduring a tough session.

Shares in BP dropped one per cent, or 5.2p to 517.5p, after the group said it would stomach a one-off $1.5 billion (£1.1bn) hit from US President Donald Trump's tax reforms.

The company said the reduction of the US federal corporate income tax rate from 35 per cent to 21 per cent, which came into force on Monday, will mean its future US earnings will be "positively impacted".

However, the reform will require a revaluation of BP's US deferred tax assets and liabilities, with the estimated impact of the "one-off non-cash charge" to the group income statement of around $1.5bn (£1.1bn).

Royal Dutch Shell was also in the doldrums after it announced it would no longer offload its Danish refining business for $80 million (£60m) to Dansk Olieselskab.

The deal was first revealed in September 2016 and had been expected to complete last year.

However, the oil giant said Dansk Shell will remain under Shell's ownership and "continue business as usual", causing shares in Royal Dutch Shell B to fall 8.5p to 2,500p.

Across Europe, Germany's Dax was down 0.4 per cent and the Cac 40 in France was 0.5 per cent lower.

On the currency markets, the pound surged against the American dollar after the greenback plunged when analysts cast doubt over the US Federal Reserve's ability to hike interest rates three times this year.

Sterling was up 0.7 per cent versus the US dollar at 1.359 and 0.3 per cent higher against the euro at 1.128, as traders brushed aside worse-than-expected data from the UK manufacturing industry.

Manufacturing activity eased from a near four-and-a-half-year high in terms of pace of growth, but still stumped up "solid" output and order growth last month.

The closely watched Markit/CIPS UK Manufacturing purchasing managers' index (PMI) showed a better-than-expected reading of 56.3 in December, down from 58.2 in November.

The price of oil gave up gains from earlier in the session when traders pondered whether political protests in Iran would impact supply.

Brent crude was down 0.3 per cent at 66.36 US dollars a barrel when the London market closed.

David Madden, market analyst at CMC Markets UK, said: "Whenever there is political upheaval in the Middle East, oil traders usually fear for the worst and stock up as they fear that supply lines will be disrupted."

In UK stocks, British Airways-owner International Consolidated Airlines Group (IAG) was among the biggest risers after confirming a €20m (£17.7m) takeover of Austrian airline Niki.

Shares climbed close to three per cent, or 17.8p to 668.8p.

Away from the top tier, Patisserie Holdings surged more than seven per cent amid speculation the firm will launch a fundraising to help bankroll a swoop for Gail's Bakery.

The owner of Patisserie Valerie was up 25.3p to 378.5p following reports the high street cafe chain is gearing up for a £35m placing.

The money would underpin a takeover bid for Gail's owner Bread Holdings, according to Sky News.

The biggest risers on the FTSE 100 Index were Anglo American up 45.5p to 1,595p, Centrica up 3.9p to 141.2p, IAG up 17.8p to 668.8p, easyJet up 37p to 1,501p.

The biggest fallers were Rentokil down 10.5p to 307.5p, Admiral Group down 53.5p to 1,948.5p, Standard Life Aberdeen down 11.2p to 425.4p, Direct Line Insurance down 9.7p to 372p.