LONDON (AP) -- Uncertainty over the progress of U.S. budget talks and their impact on the outlook of the world's largest economy damped investor sentiment Tuesday.
Though stocks have generally performed better than expected following Monday's reverse on Wall Street, analysts said any advance was fragile and dependent on budget discussions between the White House and Congress in Washington. An agreement has to be reached by the end of this year to avoid the so-called "fiscal cliff" of automatic tax increases and spending cuts.
"Investors are becoming accustomed to stepping on to firm soil each morning as the fiscal cliff looms ever closer, while tremors tend to rattle the earth later in the day," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. "Tuesday bears the same hallmark."
In Europe, the FTSE 100 index of leading British shares closed off 0.04 percent at 5,869, while Germany's DAX was flat on the day at 7,435. The CAC-40 in France was 0.4 percent higher at 3,580.
In the U.S., the Dow Jones industrial average was down 0.1 percent at 12,950 while the broader S&P 500 index was off 0.3 percent to 1,404.
With little economic news out to offer guidance, investors will likely continue to focus on the budget talks, a day after the Republican majority in the House of Representatives responded to the White House's plan with its own. Most analysts think a deal will be cobbled together before the year's end, though there may be setbacks along the way.
"Equity markets remain unsettled for as long as the gap between tax increases and spending cuts cannot be bridged," said Neil MacKinnon, global macro strategist at VTB Capital. "We remain hopeful that at least some sort of partial compromise can be reached before the end of this year."
Beyond the U.S., Thursday's European Central Bank policy meeting will also garner some interest in markets. Though investors do not expect a cut in the benchmark interest rate, they will be interested in the latest quarterly economic forecasts from the bank.
With worries over Europe's debt crisis easing in recent weeks, and Greece's future in the single currency zone seemingly secured for a while yet, the euro has prospered. It was up a further 0.3 percent at $1.3093 on Tuesday.
The key moment of the trading week will likely be Friday's U.S. nonfarm payrolls figures for November, though the figures could be distorted by the impact of Superstorm Sandy which battered much of the eastern seaboard. There's already evidence the storm has had an impact on the economy — Monday's monthly manufacturing survey from the Institute for Supply Management was far weaker than anticipated.
Earlier in Asia, Japan's Nikkei 225 index fell 0.3 percent to close at 9,432.46 while Hong Kong's Hang Seng gained 0.2 percent to 21,799.97. South Korea's Kospi fell 0.3 percent to 1,935.18. In mainland China, the Shanghai Composite Index rose 0.8 percent to 1,975.14. The smaller Shenzhen Composite Index added 1.3 percent to 743.62.
Oil prices were subdued following Monday's weak U.S. manufacturing figures, with the price of a barrel of benchmark New York 71 cents lower at $88.40.