The FTSE 100 slumped to a three month low as the US budget deadlock showed no signs of easing.
Even news that US president Barack Obama plans to nominate a dovish candidate as next head of the Federal Reserve could not persuade London traders to keep risk on the table, as the index fell 27.92 points to 6,337.91.
Alastair McCaig, market analyst at IG, said: “A month ago investors would have been celebrating the news that Janet Yellen had been given the nod for Fed chair, but, while markets responded positively, respite was brief as the disaster zone that is the debt ceiling debacle is keeping a cap on gains.”
The globally sensitive mining sector was the main drag. Slapped with a downgrade from Morgan Stanley, Vedanta Resources was the biggest faller, down almost 5 per cent at 1,020p despite a fairly good trading update on its oil and gas production.
But the risk averse mood helped the usual defensive stocks in the utility sector. National Grid and SSE were both ahead by more than 1 per cent, at 743.5p and 1,454p respectively.
Many investors also turned to the builders following the flurry of recent data that has highlighted the recovery in the UK housing market. Persimmon jumped 54p to 1,131p, while in the FTSE 250, Bellway added 50p to 1,320p, Barratt Developments rose 1.1p to 320p and Taylor Wimpey gained 5.1p to 103.8p.
Other beneficiaries from the house market optimism included mortgage lender Lloyds Banking Group, which rose 0.4p to 72.9p, and B&Q owner Kingfisher which gained 3.6p to 364.8p.
Wickes owner Travis Perkins was 8p higher at 1,586p, while estate agency business Countrywide improved 10p to 550p in the second tier.