Banking shares suffered more heavy losses today as traders continued the countdown to potential financial meltdown in the United States.
The FTSE 100 Index was only slightly lower late in the session as the weighty mining sector and safe-bet utility firms helped offset greater losses.
But the ongoing deadlock between politicians over lifting the debt limit in the United States to avoid a default coupled with another damning debt downgrade for Greece to rock traders' confidence.
Ratings agency Moody's cut Greece's debt to two notches above default status, sparking further concerns over the eurozone debt crisis.
Moody's also warned the latest rescue package from the EU for Greece could lead to downgrades in other countries because of the precedent for further bail-outs.
Shares in the banking sector plunged by as much as 5% on the London market as the crisis in the US and Moody's latest move concerning Greece shook confidence in the industry.
Barclays sank to the bottom of the shares index, falling nearly 4%, while Lloyds Banking Group and Royal Bank of Scotland suffered similar falls.
US lawmakers hoped to reach a compromise on lifting the debt ceiling yesterday, but the talks stalled.
President Barack Obama wants to raise revenues by letting tax cuts for high-earning Americans expire, while the opposing Republican party is fighting for more spending cuts and have rejected higher taxes.
The US will not have enough cash to meet its debt payments if an agreement is not made by August 2 - which could send shockwaves through global financial markets.
Ben Potter, market strategist for IG Markets, warned concerns over the debt deadlock in the US would continue.
He said: "The only thing you can be assured of over the coming hours and days is volatility as the political posturing continues in the US."
In Greece, Moody's risked angering the Government which has attacked credit agencies for adding to instability in the eurozone by downgrading debt.
Moody's said the new EU package of measures for Greece implies "substantial" losses for private creditors and as a result, cut its rating by three notches.
The EU and the International Monetary Fund (IMF) agreed to give Greece a second bailout worth 109 billion euros (£96 billion), on top of the 110 billion euros (£97 billion) granted in rescue loans a year ago.
Financial markets have experienced losses in recent weeks as fears that much bigger economies such as Spain and Italy may follow in the footsteps of Ireland, Portugal and Greece.Reuse content