* FTSE 100 down 0.4 percent
* Index gains 6.3 percent this year, lags European peers
Britain's top shares fell on Monday, the final trading session of 2012, led lower by banking stocks as faltering U.S. budget talks knocked investor sentiment.
The FTSE 100 was down 20.92 points, or 0.4 percent, at 5,904.45 by 0859 GMT, having shed 0.5 percent on Friday.
Financial markets face kicking off 2013 without a deal to avert the "fiscal cliff" of steep tax increases and spending cuts. Lawmakers in Washington have been struggling to reach agreement, but there are still significant differences between the two sides. The U.S. Senate will convene at 11 a.m. Washington time (1600 GMT) to continue discussions.
London markets will have closed by then, with the half-day session finishing at 1230 GMT.
"I can't see there being a deal done today ... I imagine we're going to come off quite heavily, so down today ... (and) Wednesday fairly heavily down," said Joe Rundle, head of trading at ETX Capital.
Tobacco stocks, which tend to be in demand even in harsh economic times, found favour on Monday, with Imperial Tobacco and British American Tobacco among the top blue-chip risers, up 0.5 percent and 0.2 percent respectively.
"The pressure is on the FTSE. With this being a news-driven market, traders should expect increased volatility. The charts indicate a strong bias to the downside," James Hyerczyk, analyst at Autochartist, said in a note.
Hyerczyk pointed out that the current long-term range is 5,605.60 to 5,997.00, which has created a retracement zone at 5,801.30 to 5,755.11 - his targets for the FTSE 100.
The UK benchmark has climbed 6.3 percent this year, helped by gains in banking shares, but has lagged European peers as heavyweight mining shares struggled in the first half of the year.
Miners lost around 30 percent peak-to-trough this year, but have recovered about 20 percent since June.