Banking and commodity stocks were the main drag on London's FTSE 100 share index by midday on Monday, although many investors stayed on the sidelines amid political uncertainty in Italy.
The FTSE was down 34.76 points, or 0.6 percent at 1217 GMT, off an early-trading low of 5,432.16.
The index regained some ground late in the morning amid trader talk the Italian Prime Minister, Silvio Berlusconi, was set to resign, fuelling hopes that a coalition government would be formed to start tackling the country's debt problems.
There could be a small relief if Berlusconi steps down but traders are really looking further down the line and there still are big issues out there, like refinancing Italy's debt, said Matt Brown, a trader at Catalyst Markets.
Buyers are waiting to see how the euro pans out before coming back into the market.
Investors were monitoring developments in Brussels, where euro zone finance ministers were working on strengthening their bailout fund to enhance its credibility.
Meanwhile, Greek political leaders were set to choose who will lead a new coalition on Monday and push through a bailout before the country runs out of money in mid-December, with local media reports tipping former ECB deputy head Lucas Papademos for the job.
Morgan Stanley described the policy response so far as inadequate and downgraded European equities to underweight.
The broker, which recommended switching out of financials and into defensives, also cited weakening economic growth, shrinking margins and less constructive readings from market timing indicators.
Banks <.FTNMX8350>, miners <.FTNMX1770> and oil <.FTNMX0530> stocks were once again under pressure, in a sign fears about the global economy and the euro zone crisis prevailed.
Citgroup highlighted recently disappointing economic data from China as reinforcing the negative sentiment surrounding miners.
We expect the economy to continue decelerating in the next months as a result of previous policy tightening and external headwinds, Citigroup said in a note on Monday.
Miners are cheap, in our view. The only problem is that they are competing with a lot of 'similarly-cheap' sectors. The number of FTSE 100 stocks that are yielding more than UK gilts is at an all-time high.
The domestic front provided little relief, with a report warning Britain's economy is at serious risk of contracting in the current quarter as services firms falter.
Pumps maker Weir
In the broader market, Premier Foods
U.S. stock index futures pointed to a weaker open for equities on Wall Street, ahead of October's U.S. employment index due out at 1500 GMT, following mixed non-farm payroll data on Friday, with September consumer credit figures due at 2000 GMT.