The top shares fell back on Wednesday after approaching technical resistance levels, weighed down by banking stocks as UK GDP figures came in below expectations, prompting further profit-taking in the sector.
Underlying sentiment however was relatively upbeat ahead of the conclusion of a two-day policy meeting of the U.S. Federal Open Market Committee, expected to result in forecasts showing interest rates will be near zero for at least two more years.
Traders said such a move could support equities, as it would likely spur investors to put their cash into interest-generating assets such as equities -- and not necessarily solely in the United States, meaning some money could filter into the UK.
Banks <.FTNMX8350> were among the most hefty fallers on the FTSE 100, led down by a 3 percent drop in RBS
Pan-European peers were also out of favour, hit by worries that pressure on the European Central Bank to write down its Greek bond holdings could compromise its ability to purchase peripheral debt.
The UK banking sector has risen 11.5 percent this year, against a 2.5 percent rise on the FTSE 100.
Concerns that Britain may be entering recession impacted banking stocks after official data showed its economy contracted more than expected in the final three months of 2011, as factory and utilities output slumped.
The numbers are marginally worse than expected, however I am not too concerned as we were always going to get a weak Q4, Peter Dixon, economist at Commerzbank, said.
I suspect that given the fact we had some reasonable run over the course of the last month, this is the kind of number which gives those investors that want to sell the excuse to jump out, he said, adding that the FOMC outcome has the potential to spur a rebound on the index on Thursday.
Furthermore, market players highlighted that newsflow surrounding the UK economy is hardly pivotal in driving investment decisions, given the UK accounts for only about a third of FTSE 100 profits.
I am more optimistic on the outlook for growth in the emerging markets and the U.S. so my fund investments are concentrated on companies with exposure to those regions, said Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, which has 135.3 billion pounds ($210.9 billion) of assets under management.
The UK benchmark <.FTSE> was down 39.36 points, or 0.7 percent, at 5,712.54 by 1228 GMT, having retreated from an intra-session high of 5,777.69, falling short of the 5,800 resistance level.
Sentiment earlier had been underpinned by quarterly results from consumer technology bellwether Apple
(Editing by Helen Massy-Beresford)