The FTSE 100 was down 0.4 percent by 0828 GMT as stocks across Europe fell 0.7 percent. Italy's FTSE MIB tumbled 2 percent after stern words from the European Union on Italy's budget sent bond yields to new highs.

Oil majors Royal Dutch Shell and BP dropped along with crude prices after Washington said it may grant waivers to sanctions against Iran's oil exports next month . Shell fell 2.4 percent and BP 4.3 percent.

Schroders rose 1.1 percent after the asset manager said it was in talks with Lloyds to work together in the wealth sector. Asset manager Schroders said discussions were ongoing and there was no certainty that they would lead to a deal.

"We think this move makes good sense for both parties - Lloyds gets access to Schroders's investment management capabilities while Schroders gets access to Lloyds distribution," wrote Bernstein analysts.

Tesco shares fell 1 percent after broker Kepler Cheuvreux cut its target price on the stock to 232p from 261p.

Overall, the FTSE 100 has held up relatively well compared with its European peers in the past weeks. Brexit negotiations are weighing on the pound, which usually helps the exporter-heavy index.

On Monday, sterling fell as traders reassessed the chances of a breakthrough in Brexit negotiations after negative weekend media reports .

Goldman Sachs analysts said international UK stocks should be relatively insulated from Brexit risks because they're less exposed to domestic economic weakness and they benefit when sterling falls.

"We find that insulation still exists: the correlation remains negative, although less so than at the beginning of the year," said analysts at the US bank.

Analysts overall have cut their estimates for FTSE 100 earnings as the support from sterling fades.

Lancashire shares fell 6.2 percent to the bottom of the FTSE 250 after the property and casualty insurer forecast catastrophe losses of $25 million to $45 million from recent hurricanes, resulting in a negative return on equity in the third quarter.

Countrywide rose 2.9 percent to the top of the small-caps index after Peel Hunt reinstated its rating on the stock at "hold".

"With a new, simplified strategy to rebuild profitability and a recapitalised balance sheet, Countrywide is on a firmer footing than it has been for some time," wrote Peel Hunt analysts.