Top shares went into retreat on Tuesday after disappointing U.S. retail sales data raised concern over the strength of the economic recovery, prompting a move out of banks and miners into more defensive sectors.
A 0.4 percent rise in retail sales fell short of the 0.7 percent increase expected by economists polled by Reuters, reflecting cutbacks in car purchases and online shopping.
Everybody thought that the U.S. retail sales numbers were going to be very, very good and they were alright, but they certainly weren't as good as people expected, Michael Hewson, market analyst at CMC Markets, said.
It just reinforces the fact that there are quite a significant amount of problems that still need to be resolved - not only in Europe but also in the U.S. economy.
Moody's warnings late on Monday that it could downgrade top-rated sovereigns including Britain also left the market on edge, though did not come as too much of a shock, traders said.
Compounding worries, traders warned that fourth-quarter euro zone GDP data, set for release on Wednesday, could point to the fact the region is back in recession.
The benchmark <.FTSE> closed down 5.83 points, or 0.1 percent, at 5,899.87, having risen 0.9 percent on Monday after Athens's approval of austerity measures helped ease fears over a messy default.
Miners and banks, strong gainers on Monday, were the biggest drags on the index, as investors, rattled by the downbeat U.S. data and unconvinced Greece is off the hook, switched into defensive sectors such as drugmakers.
Yet more dire economic figures posted by Greece on Tuesday made it increasingly difficult to see the country being able to get its deficit under control, with flash estimates showing GDP shrank 7 percent in the fourth quarter of 2011.
Those that missed the recent rally are reluctant to buy in for fears of an imminent sell off, Atif Latif, director of equities and derivatives at Guardian Stockbrokers, said.
With sector rotation and defensive buying alongside downside protection being aggressively bought we may have seen the last push up before a correction.
We believe that the recent relative underperformance could be a good entry point ahead of FY results on 27 February, JPMorgan said in a note.
Outsourcing group Capita
(Editing by Jodie Ginsberg)