LONDON Top shares posted modest gains on Monday, helped by strength in heavyweight mining stocks after data showed China's manufacturing sector expanded for the first time in over a year.
But strong earlier gains were eroded in the afternoon after disappointing U.S. manufacturing data raised concerns over the health of the world's biggest economy just as politicians haggle over how to avoid the "fiscal cliff" at the end of the year.
The FTSE 100 closed up 4.42 points, or 0.1 percent, at 5,871.24 points, having run back from an early session peak just above the psychologically important 5,900 level.
"Goodbye Santa Rally for now, as poor U.S. data mixed with the persistent worries about the fiscal cliff which remains unresolved," said Ishaq Siddiqi, market strategist at ETX Capital.
"Traders are taking a prudent approach here now, as major upcoming data in the U.S. this week such as the key monthly jobs report may likely disappoint. It must be noted that super storm Sandy has distorted major leading indicators but investors are taking no chances with this one," Siddiqi added.
Volumes were very thin at just 44 percent of the 90-day daily average on the first session of the final month of 2013.
Stocks seen as defensive attracted the most interest, with drugmakers and tobacco the two best performing sectors.
Gains in miners helped as the sector benefited along with the copper price on hopes for improved demand from China, the world's top metals consumer.
The latest readings from official and private sector surveys of China's vast manufacturing sector showed activity picked up in November, adding to evidence the economy is reviving after seven quarters of slowing growth.
British manufacturing activity also shrank much less than expected in November, although the sector remains in a precarious state as new orders edged down.
But manufacturing data from the United States was less positive, with November's ISM PMI contracting more than expected, helping drag Wall Street back from early gains, with the U.S. blue chips down 0.2 percent by London's close.
Traders were also awaiting fresh news on the negotiations to avoid the U.S. fiscal cliff, a combination of spending cuts and tax rises due to be implemented in early 2013 that could tip the world's leading economy back into recession.
"If data points into the festive period worsen more so than anticipated, then the market will likely reflect any such deterioration," said David White, Financial Trader at Spreadex.
"Indeed, if this belief by investors that current prices are reflecting well the present value of expected future cash flow is to find longevity, figures like today's (U.S. ISM) must be seldom seen," White added.
Plumbing supplies firm Wolseley, heavily exposed to the U.S. economy via the housing sector, was a blue chip faller, down 1.1 percent ahead of a trading update due on Tuesday.
Weak energy stocks was the biggest drag on the blue chips as Brent crude slipped after the U.S. data.
And as the early Santa Rally for stocks proved subdued, food retailers were weak, led by Sainsbury, down 1.4 percent. Waitrose, the upmarket supermarket chain owned by John Lewis, posted a 7.8 percent rise in sales in the week to December 1, with online sales jumping 58.2 percent year-on-year.
Waitrose has been outperforming the wider UK grocery market, helped by the success of its 'essentials' value range and free delivery for online shopping, raising competition worries for the key festive period.
(Editing by Hugh Lawson)