The FTSE 100 Index sank back into the red today as euphoria over a eurozone bail-out faded and investors wrestled with political uncertainty in the UK.
The London market - which soared more than 5% yesterday in its best day for more than a year - fell over 1% today, while the pound edged lower to 1.48 against the dollar.
Stocks lost momentum despite the weekend agreement of a 750 billion euro (£650 billion) package to prop up the single currency and create a rescue fund for struggling nations.
Wall Street's Dow Jones Industrial Average finished almost 4% ahead overnight but Asian markets failed to sustain the rally, with Hong Kong's Hang Seng down 1.9% and the Japanese Nikkei off 1.3%.
The resignation of Gordon Brown as Labour Party leader also revived chances of a coalition between Labour and Liberal Democrats, after earlier market hopes that the Lib Dems were close to a deal with the Conservatives.
Michael Hewson, currency trader at CMC Markets, said of the political manoeuvring: "This new element throws into doubt hopes of a quick deal in order to deal with the problem of the UK deficit and adds to the uncertainty surrounding the type of government the UK might get."
He said the pound was unlikely to break above 1.50 while the talks continue, with a return to the lows of last week if the political uncertainty drags on.
Meanwhile, the weakening of the euro to 1.16 against sterling reflected realisation that the bail-out was "a sticking plaster to a much deeper rooted problem" of high deficits, Mr Hewson added.
In London most stocks were in the red as banking and commodities firms - many of which posted double-digit gains yesterday - retreated.
Part-nationalised Royal Bank of Scotland was the Footsie's leading faller with a 4% dive, while Barclays and HSBC dropped 2%.
Elsewhere, tour operator TUI Travel - which owns Thomson Holidays - and budget airline easyJet both posted losses after revealing a combined blow to profits from April's volcanic ash cloud of up to £160 million.Reuse content