Top share index shrugged off sharp losses at the open and steadied Tuesday, as gains in defensive stocks offset falls in riskier assets after Standard & Poors ratings agency threatened to downgrade 15 euro zone countries.
S&P warned it may downgrade 15 out of 17 euro zone countries, including top-rated Germany and France, if EU leaders fail to agree on a plan to solve the debt crisis at a summit on Friday.
(The timing of the announcement) is certainly not going to help the fragile sentiment we've become used to. Having said that there's an increasing tendency to take these credit rating downgrades with a pinch of salt, especially when it includes Germany, Richard Hunter, Head of Equities at Hargreaves Lansdown Stockbrokers said.
Hunter said the overall situation for the euro zone on a balance sheet basis looked more positive, and S&P's announcement had given investors a reason to pause for breath rather than to sell off sharply.
Typically, the riskier assets such as banks <.FTNMX8350> and miners <.FTNMX1770> were weaker as London's blue chip index <.FTSE> slipped just 1.82 points to 5,566.14 at 9:11 a.m., having closed at a five-week high Monday.
S&P's warning dented the progress the FTSE 100 had made, rising around 8 percent over the previous eight trading days.
The index has gained in response to initiatives by central banks to boost liquidity in the financial system and hopes Europe's leaders can find a way to prevent contagion spreading.
S&P's announcement came after the announcement of a Franco-German initiative, to be discussed Friday, to enforce budget discipline across the 17-member zone through EU treaty changes.
Traders said any action by the S&P would kill the EFSF (European Financial Stability Facility) as it would mean that it would be unlikely to carry a triple 'A' rating, especially if France is downgraded, which now seems increasingly likely.
Miners such as Kazakhmys
Deutsche Bank said the success or failure of policy actions over coming days would be judged, among other things, by the degree to which the heightened level of equity market volatility begins to normalise, if at all.
A more sustained reduction in asset market volatility, helped by a further reduction in official rates by the ECB (European Central Bank) Thursday, would in our view provide a necessary condition for the deterioration in the global growth and specifically western world growth to stabilise, it said.
The latest third-quarter GDP data from the euro zone is scheduled for release at 1000 GMT.
British retailers fell in early trading after a survey published overnight said they suffered their biggest annual fall in underlying sales since May last month after widespread discounts failed to lure in pre-Christmas shoppers.
Analysts at Singer Capital Markets cut their clothing sector profit forecasts, taking them 5 percent below consensus on average to reflect how difficult October and November have been, and how margins will probably come under intense pressure in December.
On the upside, Wolseley
Seymour Pierce, which said the results were ahead of its expectations, raised Wolseley's rating to hold from sell.
Defensive stocks dominated the leaders as investors' mood turned cautious, with Vodafone
In the pharmaceutical sector, Goldman Sachs reiterated its buy rating on Shire, given continued market uncertainty, and its preference for structural leaders in the sector.
On the broader outlook for equity markets, Goldman Sachs said: The first few months of 2012 are likely to be weak, as equity markets digest softer growth especially in Europe.
However, we expect some resolution to sovereign funding problems in Europe, and together with improved signs of growth, this should ignite a recovery in markets at some point in first-half 2012.
(Editing by Sophie Walker)