The FTSE 100 Index made several attempts to rally into positive territory but closed 16.39 points lower at 6,449.27.
William Nicholls, a dealer at Capital Spreads, said: “The good news is that the signs have certainly improved and the panic has waned in the short term.
“However, this doesn’t necessarily feel like a short term trend. With the US debt ceiling issue returning to the news and more than likely disappointing non-farm payroll numbers on Friday, we may just be in the eye of this particular storm.”
Chip maker Arm Holdings took a beating after reporting slightly lower than expected numbers for the forth quarter. Its shares were down 55p at 875p, a drop of almost 6 per cent.
And following strong gains in the previous session, miners Fresnillo and Randgold Resources slipped back as precious metals prices weakened slightly. Randgold sank 3 per cent at 4,319p, while Fresnillo slipped 1 per cent at 772.5p.
But financial stocks were on the rise as traders started looking for value after the recent emerging markets driven sell off. Aberdeen Asset Management added almost 5 per cent, up 18.3p at 395p, while RSA Insurance gained 2.75p at 99p after hiring former RBS boss Stephen Hester to lead turnaround efforts.
Fellow insurer Prudential gained 3 per cent after having its rating reaffirmed by a number of brokers despite concerns about the developing world. Its stock added 38p at 1,242p.
Broker comment also helped drive gains at Associated British Foods, up 76p at 2,762p after Morgan Stanley raised its price target for the company.