Britain's top shares fell slightly on Friday in choppy trade as hopes waxed and waned that a European summit would take significant steps towards solving the region's debt crisis.
Disappointingly for investors, European leaders failed to agree on a treaty change and decided to cap the euro zone's permanent bailout fund, with the fund also not to get a banking licence that could have increased its firepower.
But summit talks are set to resume later in the day, and market participants said there was some cause for reassurance.
I think there are signs that the general direction is positive. Obviously they continue to talk about these tough budgetary constraints, and the talk of some kind of fiscal union certainly seems to be on the agenda, Richard Hunter, head of equities at Hargreaves Lansdown, said.
But set against that is the lack of detail ... The other slightly worrying thing is amidst what we have heard so far there doesn't seem to have been much talk around promoting economic growth -- because obviously economic growth would be the short cut to reducing the debt crisis.
Sentiment was at a low ebb after European Central Bank President Mario Draghi on Thursday cooled market expectations about the prospect of an acceleration in ECB bond purchasing, although the bank did cut interest rates by 25 basis points to 1 percent.
After suffering hefty falls in the previous session, some strength was seen among banks <.FTNMX8350> on Friday.
Elsewhere among fallers, GlaxoSmithKline
The UK benchmark was down 6.23 points, or 0.1 percent, at 5,477.54 by 9:35 a.m., having dropped 1.1 percent on Thursday after yet another see-saw session.
The index has gained about 7 percent over the past two weeks on mounting expectations of an imminent solution to Europe's debt crisis.
Atif Latif, director of equities and derivatives at Guardian Stockbrokers, sees downside risk to the index's consolidated low at 5,362, then to 5,200/5,100, the base for the last rally, on negative news out of the summit, while good news may trigger a re-test of its recent high at 5,632.
The FTSE 100 currently trades on a price to earnings ratio of 9.9 times, compared with a historical average of around 14 times, and a price to book ratio of just 1.57, according to Thomson Reuters data. Its dividend yield of 4.15 compares favourably to those offered on safer euro zone and U.S. bonds.
UBS strategists said the recent market moves probably reflect some pricing out of extreme negative 'tail-risk' scenarios, but risks remain.
We believe the market is priced for a small decline in earnings next year, UBS said.
While we see upside to end-2012 (target 6,100 for FTSE 100), we believe that we would need to see a big positive surprise from EU politicians to push convincingly through this range-bound market in the near term.
UBS said that positive developments from the EU leaders could lead to a number of financials and mining stocks performing well, while consumer staples, utilities and pharmaceuticals should outperform if the crisis deepens.
(Additional reporting by David Brett and Jon Hopkins; Editing by Jon Loades-Carter)