The FTSE 250 <.FTMC>, which had rallied more than 3% since last week on hopes that Britain could clinch a timely divorce deal, fell 0.9%. Traders are eyeing a crunch summit this week after last-ditch talks between London and the European Union.
The blue-chip FTSE 100 was roughly flat as gains in exporter firms like Reckitt, due to a weaker pound, were offset by a drop in housebuilders after Barratt pointed to signs of weakening future revenue.
Barratt, Britain's largest housebuilder, gave up 3.7%, while peers Persimmon and Taylor Wimpey lost around 3% each.
The sector <.FTNMX3720>, which is sensitive to updates that can impact consumer spending, has also seen volatile trading in recent weeks amid a flurry of Brexit headlines.
Officials involved in eleventh hour negotiations overnight said that differences over the terms of the split had narrowed significantly.
That followed a Bloomberg report that a draft deal was close to being sealed, which spurred a rally in firms more domestically exposed, including banks such as Lloyds and RBS, and led mid-caps to a more than one-year high.
"The permutations are labyrinthine, but financial markets are not hanging around to await the details," Oanda analyst Jeffrey Halley said, though he warned that market participants could yet be left disappointed.
Uncertainty remains whether a deal will be sealed at an EU summit on Thursday and Friday, and if Britain's minority government can get it through parliament.
News-driven moves saw AIM-listed ASOS, a victim of multiple profit warnings this year, jump 14% after the online fashion retailer said it had made strides in resolving warehousing issues that ate into its annual profit.
In contrast, clothing retailer Next skid 2.5% after its CEO sold more than 10 million pounds worth of shares, while mid-cap Royal Mail fell 6% after a major union voted in favour of a nationwide strike.
Shares of Woodford Patient Capital Trust sank 6.4% to a fresh record low, a day after embattled money manager Neil Woodford resigned as its investment manager.
(Reporting by Shashwat Awasthi in Bengaluru; editing by Patrick Graham and Shounak Dasgupta)
By Shashwat Awasthi