Britain's top share index shed earlier gains to end down 0.5 percent on Tuesday, after Federal Reserve Chairman Ben Bernanke's comments that US inflation was not about to subside, deflating hopes of an interest rate cut.
The FTSE 100 ended down 31.3 points at 6,632.8, with investors also cautious ahead of the Bank of England's decision on UK interest rates on Thursday. UK borrowing costs currently stand at 5.5 percent, and another hike is expected in the coming months, though most economists expect no move this week.
"However positive investors are about equities as an asset class, a check with reality is no bad thing from time to time," said David Buik of Cantor Index. "With interest rates going up in Europe and the UK ... and manufacturing output and retail activity coming off the boil, it is hardly surprising that the main European bourses took a breather today," he added.
Housebuilders and retailers bore the brunt of interest rate concerns. Among housebuilders, Persimmon was off 2.6 percent, and Land Securities was down 2.2 percent. In the retail sector, Next shed 2.3 percent, while Segro lost 2.4 percent.
European indexes slipped after the US Federal Reserve's Bernanke said there was a risk that current levels of core US inflation would not yet subside, further dimming the prospects for a rate cut later this year.
"People are a bit fed up, really, with the endless, endless drip, drip, drip of inflation and rising interest rates," said Dan Bunting, head of research at Fortis Private Investment Management in London.
Leading the FTSE 100 decline, shares in InterContinental Hotels Group fell 3 percent as traders cited fading bid hopes after comments made by its chief executive after the close on Monday.
United Utilities added 3 percent to top the FTSE 100 gainers after it put its electricity distribution business in north-west England up for sale to focus on its water assets, and reported a 16 percent increase in annual profit.
The utility stock also benefited from Dresdner raising its price target, and Charles Stanley raising its rating on the stock. Among miners, BHP Billiton Antofagasta and Kazakhmys all rose between 1 and 1.7 percent after a positive sector note from Citigroup.
BHP Billiton was upgraded to "buy" from "hold", with a price target of 1,500 pence from 1,250 pence. On the downside, though, airlines' shares lost altitude after Ryanair, Europe's biggest low-cost carrier, warned its profit growth would slow, citing rising interest rates. British Airways fell 1.8 percent, and easyJet dropped 6.8 percent.
Daily Mail & General Trust dipped 1.4 percent after Morgan Stanley downgraded its recommendation of the stock to "equal-weight" from "overweight". In mid-caps, Europe's biggest mobile phone retailer, Carphone Warehouse, added 6.1 percent after it beat average forecasts with its annual pretax profit and gave a positive outlook.
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