Sharecast - The FTSE 100 was down 0.3% at 7,579.22.
Susannah Streeter, head of money and markets at Hargreaves Lansdown (LON:HRGV), said: "The week’s early optimism has been clouded by renewed concerns about a looming recession in the America, while the repercussions of the banking crisis appear to be coming back to bite big US lenders.
"As the world’s largest economy shows more signs of heading for a contraction, with growth in the mighty services sector slowing more quickly than expected last month, worries are rising about the knock-on effect around the world. It’s helped erase crude oil gains, with the effects of Saudi Arabia’s production cut drowned out in the noise about slowing demand."
Streeter said that while signs of further slowing in activity is not great news for the US economy overall, "it’s music to the ears of Fed policymakers who are anxious for signs that inflation is responding to monetary tightening".
"The ISM Services PMI reading, showing a slowdown in growth in May is another nugget of data to add to the growing weight of evidence that interest rate rises are having the desired effect, and bets are rising that the Fed will press pause next week. But it’s going to keep its powder dry and another rate hike could still come this summer."
Investors were also digesting a surprise rate hike by the Reserve Bank of Australia, which argued that inflation was still too high.
The RBA lifted the cash rate by 25 basis points to 4.1% - the highest level in 11 years and the 12th increase in little more than a year. Economists had been expecting the Bank to leave rates unchanged.
Governor Philip Lowe: "Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range.
"This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe."
The RBA’s target for inflation is between 2% and 3%.
On home shores, a survey showed the construction sector saw an uptick in activity last month, although higher interest rates continued to weigh heavily on house building.
The latest S&P Global/CIPS UK construction purchasing managers' index nudged up to 51.6 in May, from 51.1 in April and comfortably above consensus, for 50.8. A reading above the neutral mark of 50 indicates growth, while one below it suggests contraction.
Driving the rise was commercial building, at 54.2, and civil engineering, at 53.9, with respondents reporting faster decision making on new projects and improved customer confidence.
The survey also pointed to normalising supply conditions, which helped ease cost pressures.
However, higher interest rates continued to weigh heavily on housing activity, at 42.7. Work on residential building projects decreased for the sixth consecutive month and at the steepest rate since May 2020. Once the pandemic was stripped out, it was weakest index reading for just over 14 years.
Tim Moore, economics director at S&P Global Market Intelligence, said: "Rising demand among corporate clients and contract awards on infrastructure projects underpinned the fastest rise in new orders since April 2022.
"However, cutbacks to new residential building projects, in response to rising interest rates and subdued housing market conditions, resulted in the sharpest drop in housing activity for three years."
Retail sales figures were also in focus, as they showed a slowdown in May despite a succession of bank holiday weekends.
In equity markets, oil giants Shell (LON:RDSa) and BP (LON:BP) were among the worst performers, having gained on Monday in tandem with rising oil prices.
Primark owner Associated British Foods (LON:ABF) nudged lower after announcing the acquisition of dairy technology company National Milk Records for £48m.
Chemring shot to the top of the FTSE 250 as it posted a drop in interim profit and revenue, but reported a record order book.
Paragon Banking also surged as it lifted its full-year guidance for net interest margin and mortgage lending, and increased its buyback programme.
British American Tobacco (LON:BATS) gained as the cigarette and vaping products maker held full-year revenue and profit guidance, with trading weighted towards the second half.
The company said it expects a 3% to 5% rise in organic revenue on a constant currency basis for 2023 and mid-single digit growth in adjusted earnings, although it warned the timing of the transfer of its Russian and Belarusian businesses would have an impact.
Market Movers
FTSE 100 (UKX) 7,579.22 -0.27%
FTSE 250 (MCX) 19,086.00 -0.14%
techMARK (TASX) 4,582.01 -0.15%
FTSE 100 - Risers
Ocado Group (LON:OCDO) 358.60p 4.43%
Abrdn (ABDN) 217.20p 3.43%
Legal & General Group (LGEN) 237.80p 1.45%
Standard Chartered (LON:STAN) 666.20p 1.12%
London Stock Exchange Group (LON:LSEG) 8,752.00p 1.04%
Severn Trent (LON:SVT) 2,773.00p 1.02%
Rentokil Initial (LON:RTO) 653.20p 0.90%
Burberry Group (LON:BRBY) 2,190.00p 0.88%
Intertek Group (LON:ITRK) 4,338.00p 0.81%
United Utilities Group (UU.) 1,060.00p 0.76%
FTSE 100 - Fallers
Shell (SHEL) 2,231.00p -2.36%
Vodafone Group (LON:VOD) 76.46p -1.87%
BT Group (LON:BT.A) 142.60p -1.76%
BP (BP.) 464.70p -1.74%
Johnson Matthey (LON:JMAT) 1,778.50p -1.44%
Pershing Square (NYSE:SQ) Holdings Ltd NPV (PSH) 2,748.00p -1.22%
Smiths Group (LON:SMIN) 1,608.50p -1.08%
Beazley (BEZ) 608.00p -1.06%
Taylor Wimpey (LON:TW.) 116.70p -1.02%
International Consolidated Airlines Group (LON:ICAG) SA (CDI) (IAG) 155.65p -1.02%
FTSE 250 - Risers
Chemring Group (CHG (LON:CHG)) 291.00p 8.38%
Paragon Banking Group (PAG) 540.50p 7.35%
Bakkavor Group (BAKK) 96.00p 4.35%
Indivior (INDV) 1,627.00p 2.33%
PZ Cussons (LON:PZC) 194.60p 2.31%
OSB Group (OSB) 526.50p 2.13%
Pennon Group (LON:PNN) 782.00p 1.89%
Sirius Real Estate Ltd. (SRE) 89.80p 1.70%
RHI Magnesita N.V. (DI) (RHIM) 2,602.00p 1.48%
Telecom Plus (LON:TEP) 1,536.00p 1.45%
FTSE 250 - Fallers
Warehouse Reit (WHR) 96.20p -6.96%
Tullow Oil (LON:TLW) 25.06p -3.69%
Hunting (LON:HTG) 217.50p -3.12%
Harbour Energy (LON:HBR) 237.40p -2.90%
Molten Ventures (GROW) 295.60p -2.38%
Urban Logistics Reit (SHED) 137.40p -2.28%
Dr. Martens (DOCS) 131.20p -2.16%
Marshalls (MSLH) 287.80p -2.04%
Ferrexpo (LON:FXPO) 95.25p -1.96%
Capricorn Energy (LON:CNE) 194.60p -1.92%