But sentiment remained cautious, holding back progress on the FTSE 100 Index, which closed down 4.03 points at 4230.02.

US investors were also nervous ahead of the Federal Reserve's decision on interest rates today and its economic assessment.

Even news that sales of existing homes rose last month by 2.4 per cent failed to provide direction, with the Dow Jones Industrial Average edging down 0.2 per cent in early trade.

However, the performance marked an improvement on Monday's heavy falls, which left the Footsie 2.6 per cent lower and the Dow deep in the red.

A bearish mood gripped markets after a welter of gloomy predictions from the World Bank and others led to fears that the recent recovery in equities since the lows of mid-March has been overdone.

Many firms that have benefited from the recent rebound – financial and commodity stocks – have fallen back.

Yesterday's leading top-flight faller was Legal & General, down 43/4p to 557/8p after it was cut to sell by analysts at Societe Generale.

Lloyds Banking Group was the worst off among banks, down 27/8p to 65p.

It was closely followed by International Power, which fell 51/2p to 2293/4p despite JP Morgan taking a more positive stance on European utilities.

Anglo American was on the back foot after the miner's board abruptly rejected a merger approach from rival Xstrata on Monday night.

It fell 46p to 1652p in spite of speculation that Chinalco could be mulling its own bid for the group.

A Chinalco spokesman in Shanghai said the company was unaware of the bid talk, while Chinalco representatives in London and officials from Anglo declined to comment.

Elsewhere in a mixed session for the sector Antofagasta rose 211/2p to 5761/2p and Eurasian Natural Resources rose 22p to 620p, although Lonmin shed 14p to stand at 1134p.

Thomson Reuters was one of the leading risers, up 4 per cent, or 59p, to 1690p, after it announced plans to ditch its London listing in favour of the Toronto and New York exchanges, where its shares have been trading at a higher price.

Distribution and outsourcing group Bunzl was up 2 per cent, or 91/2p to 495p, after it said the pound's weakness helped boost first half revenues by 17 per cent.

Outside the top flight, Debenhams shares pared back an initial gain seen after the department store chain said it had raised £323m through an offer and placing of stock. Shares were later 1/2p higher at 733/4p.

The department store chain hopes to use the cash to shrug off its debt woes and help it to take advantage of opportunities in the recession.

Yell suffered another difficult session after warning in its annual report that it may need to renegotiate its debt terms for a second time.

Investors were spooked by the update, with shares down 6 per cent, or 11/2p, to 24p, following a slump of 13 per cent on Monday.

Shares in power station firm Drax were down 3 per cent, or 121/2p, to 4361/2p as it announced a £100m cash call in order to pay down debt.

The biggest Footsie risers were TUI Travel ahead 83/4p to 2331/2p, Antofagasta, Eurasian Natural Resources and Thomson Reuters.

The biggest Footsie fallers were Legal & General, Lloyds and Standard Chartered slipped 40p to 1135p.