The FTSE 100 closed down on Monday with financials under pressure after a warning by German Chancellor Angela Merkel reignited fears of a Greek default, while GlaxoSmithKline fell on worries over its key lung drug Relovair.
London's blue chip index <.FTSE> closed down 37.42 points or 0.7 percent at 5,612.26, with volumes just 88 percent of their already weak 90-day average and as U.S. equities gave up early gains.
Traders said FTSE 100 bulls also encountered technical resistance around 5,700 -- a level the index failed to hold sustain last week -- and with the relative strength index indicating UK-listed blue chips were approaching overbought territory after last week's 1.4 percent gain.
Banks ebbed lower as investors mulled over the latest press conference from Merkel and French President Nicolas Sarkozy, which traders said was uninspiring.
The main concern revolved around Merkel's warning that Greece would not be paid its next aid tranche without rapid progress on its second rescue package.
These negotiations could go on forever. The chances are this Greek tragedy will go right down to the wire and it will be a case of who blinks first, Richard Driver, analyst for Caxton FX, said.
Banks have already been asked to take a 50 percent haircut on their Greek debt, and there are broader concerns over their balance sheets as European peer UniCredit's
For any other European banks that were considering raising new equity via the markets, the performance of Unicredit must have severely put them off, Louise Cooper, markets analyst at BGC Partners, said.
The fundamental problem is one that many banks have a highly leveraged balance sheet compared to the equity value, she said.
With euro zone worries back to the fore, Barclays
The FTSE volatility index <.vFTSE> was up 3.3 percent on Monday and Deutsche Bank warned volatility will remain high in the first few months of the year given the numerous catalysts ahead, notably in Europe.
The European sovereign crisis is far from over ... This should reinforce a geographical divide which has seen U.S. outperforming the rest of the world in 2011.
Shore Capital says the pneumonia signal - GSK will investigate some reports of fatal pneumonia at the highest dose - in chronic obstructive pulmonary disease is concerning and lack of consistency in the pivotal Phase III programme suggests a far from straightforward regulatory passage, particularly in the United States.
Retailers were under pressure after Christmas trading updates from Wm Morrison Supermarkets
Other British retailers, including Tesco
With the FTSE 100 <.FTSE> retreating, those stocks liked for their defensive characteristics were among the top gainers, with utility National Grid
Global brewer SABMiller