The FTSE 100 ended the session down 0.23% at 6,531.83, while the FTSE 250 added 0.72% to 19,764.02.
Sterling rallied throughout the session, last rising 0.77% on the dollar to $1.3326, and advancing 0.54% against the euro to €1.0970.
“Equity markets in Europe are on track to close firmly higher as traders have been encouraged by the fact that UK and EU trade negotiators will go the extra mile in a bid to hopefully secure a trade deal and avoid a no-deal scenario,” said CMC Markets analyst David Madden.
“The FTSE 100 is the underperformer of the group as the firmer pound is capping its gains.”
Madden said that to a certain extent, the moves were a reversal of Friday’s declines, as housebuilders and banks were some of the biggest gainers on the market.
“A number of big commodity companies – mining and oil – are holding back the British equity benchmark too.”
During the afternoon, it was confirmed London would move into the strictest tier 3 category for Covid-19 restrictions from midnight on Wednesday morning to combat a new form of the virus, the health secretary told MPs.
Matt Hancock said parts of Essex and Hertfordshire would also be put into tier 3, and that a new variant of Covid-19 may be behind the rapid rise in infections.
He said the government was acting before the 16 December review date to prevent health services being overwhelmed.
“We have to take swift and decisive action,” Hancock told the House of Commons.
“When the virus is spreading exponentially there is not a moment to spare.”
He said the new variant may be more infectious but that there was no sign it was more deadly or resistant to vaccines.
The top-flight was in positive territory earlier, after the UK and the EU agreed over the weekend to extend Brexit trade talks into this week, and as the EU’s chief Brexit negotiator Michel Barnier said a post-Brexit trade and security deal could be agreed as early as this week.
“From a traders’ perspective, the prospect of a potential breakthrough does provide some floor for the pound for the time being,” said analysts at IG.
“The FTSE 250 outperformance seen in early trade is largely a reversal of the declines seen in the lead up to this crucial round of negotiations.
“With banks in particular doing well, it is evident that we will see assets with high UK-exposure all move in tandem as markets gauge exactly what kind of Brexit we will see come 1 January.”
In equity markets, housebuilders and banks gained amid the Brexit hopes, with Taylor Wimpey up 4.12%, Persimmon ahead 4.91% and Barratt Developments advancing 3.81%.
Among the banks, NatWest, Barclays and Lloyds Banking Group were up 4.99%, 4.63% and 5.38%, respectively.
The housebuilders were also boosted after Rightmove predicted that house prices would rise 4% in 2021, as values continued to increase modestly after the end of the stamp duty holiday that had fuelled a mini-boom.
Prices rose 6.6% in 2020 after Chancellor Rishi Sunak scrapped stamp duty on the first £500,000 of a property purchase, Rightmove said.
Momentum tailed off in December when prices fell 0.6%, the property portal said.
“These stocks are a leveraged bet on the UK economy, which in the near-term at least is going to be at the mercy of a Brexit trade deal and the vaccination programme,” said Neil Wilson, chief market analyst at Markets.com.
“Markets have also pushed back expectations for interest rate cuts by the Bank of England, which meets later this week.”
Elsewhere, Mike Ashley’s Frasers Group rose 4.64% following reports it was edging closer to a deal to rescue part of struggling department store chain Debenhams.
Plastic piping systems manufacturer Polypipe leapt 11.38% as it said annual profit would beat expectations after revenue rose 8% in November.
On the downside, pharmaceutical company AstraZeneca slid 5.9% after saying it was buying US drug developer Alexion in a cash and shares deal worth $39bn.
FTSE 100 (UKX) 6,531.83 -0.23%
FTSE 250 (MCX) 19,764.02 0.72%
techMARK (TASX) 4,067.17 -0.10%
FTSE 100 – Risers
Next (NXT) 6,746.00p 5.64%
Melrose Industries (MRO) 163.30p 5.26%
JD Sports Fashion (JD.) 790.60p 5.16%
NATWEST GROUP PLC ORD 100P (NWG) 157.85p 4.99%
Persimmon (PSN) 2,584.00p 4.91%
Lloyds Banking Group (LLOY) 35.82p 4.87%
Ocado Group (OCDO) 2,275.00p 4.65%
Barclays (BARC) 142.48p 4.63%
Taylor Wimpey (TW.) 156.75p 4.12%
Barratt Developments (BDEV) 605.60p 3.81%
FTSE 100 – Fallers
AstraZeneca (AZN) 7,693.00p -5.74%
Polymetal International (POLY) 1,615.00p -5.22%
Royal Dutch Shell ‘A’ (RDSA) 1,360.20p -2.48%
BHP Group (BHP) 1,940.40p -2.44%
Royal Dutch Shell ‘B’ (RDSB) 1,309.40p -2.09%
InterContinental Hotels Group (IHG) 4,680.00p -2.07%
BP (BP.) 269.65p -2.03%
Anglo American (AAL) 2,408.50p -1.56%
GlaxoSmithKline (GSK) 1,392.80p -1.44%
Relx plc (REL) 1,795.00p -1.40%
FTSE 250 – Risers
Polypipe Group (PLP) 509.00p 11.38%
Aston Martin Lagonda Global Holdings (AML) 1,529.20p 7.92%
Dixons Carphone (DC.) 107.80p 6.00%
Just Group (JUST) 62.40p 5.08%
Crest Nicholson Holdings (CRST) 295.20p 4.90%
Frasers Group (FRAS) 451.80p 4.64%
Network International Holdings (NETW) 303.20p 4.55%
Vietnam Enterprise Investments (DI) (VEIL) 559.00p 4.49%
Countryside Properties (CSP) 419.40p 4.45%
Vistry Group (VTY) 835.50p 4.11%
FTSE 250 – Fallers
Micro Focus International (MCRO) 435.50p -4.86%
Centrica (CNA) 41.45p -4.62%
Plus500 Ltd (DI) (PLUS) 1,403.50p -4.10%
Liontrust Asset Management (LIO) 1,310.00p -2.96%
Centamin (DI) (CEY) 119.20p -2.66%
Hochschild Mining (HOC) 189.10p -2.63%
Wizz Air Holdings (WIZZ) 4,576.00p -2.43%
Wetherspoon (J.D.) (JDW) 1,043.00p -2.25%
Watches of Switzerland Group (WOSG) 512.00p -2.13%
Wood Group (John) (WG.) 312.40p -2.10%