LONDON The FTSE 100 edged higher on Monday after a volatile session, as signs of potential compromise in U.S. budget talks reversed early falls over fears that negotiations had stalled.
The FTSE 100 initially extended losses in afternoon trading, with a weak U.S. open and disappointing housing data compounding caution that had been instilled when a Democratic senate leader said there had been "little progress" in U.S. budget discussions.
However, stocks staged a major rally in the last hour of trading, gaining 0.7 percent after U.S. House Speaker John Boehner said he was "optimistic" that a deal with Obama could be reached to avert the "fiscal cliff" of spending cuts and tax hikes.
At the close, Britain's FTSE 100 was up 3.57 points, or 0.1 percent at 5,803.28 points, having hit a session low at 5,755.23, or a 0.8 percent loss, shortly before Boehner's comments.
Defensive stocks benefitted most, with United Utilities among FTSE 100 leaders. They rose 2 percent after the multi-utility posted a rise in first-half revenues and said it was on track to meet regulatory outperformance targets.
The small gains to the index came after a nervous start over the U.S. standoff that weighed in particular on basic materials, mainly composed of miners that are sensitive to the global growth outlook, and energy stocks.
However, even some cyclicals managed to recover losses in the afternoon. Heavyweight BP staged an afternoon recovery to close down only 0.8 percent at 429.4 pence, despite losing 2.9 percent in the minutes after it was suspended from new contracts with the U.S. government.
"It reacted initially, and it's off one percent, but it's not a colossal loss, and we've seen buyers come in around the low 420s," Will Hedden, sales trader at IG Index, said.
"It's been fairly rangebound recently ... People are thinking that there might not be upside in them, but that the worst of the downside is over."
The stock was one of the most heavily traded on the index, trading over twice its average 90-day volume, having reversed early gains that had been made after the successful sale of North Sea assets to Abu Dhabi.
"What's going to happen with the fiscal cliff is what's going to lead us, so that's going to put a dampener on any kind of Christmas rally," Nick Xanders, head of European equity strategy at brokerage BTIG, said.
"If we get a resolution, then all bets are off; you just close your eyes and buy everything. But until there is a resolution, we're going to get some very twitchy markets."
(Editing by Ruth Pitchford)