The blue-chip FTSE 100 <.FTSE> index and mid-caps both closed down 0.1 percent. Trading was delayed for an hour, which exchange operator LSE blamed on technical issues.

Falls among stocks going ex-dividend such as Vodafone and Sainsbury's capped any gains for the UK index, which underperformed continental European equities.

A rising pound also put pressure on foreign-earning stocks such as big consumer staples firms. It was a choppy day for sterling as the UK government proposed a one-year Brexit backstop plan for the Irish border to EU negotiators.

Cyclical stocks were in demand, however, with oil majors and financials driving the lion's share of gains.

A buoyant oil price sent shares in oil majors BP and Royal Dutch Shell to the top of the index, up 2.2 and 1.5 percent respectively.

The FTSE's heavy weighting in commodities stocks has helped it rebound from March's lows following a shaky start to the year, with the index now in positive territory for the year even as two key Brexit-related events loom.

Banking stocks were sold off heavily last week when worries over potential fresh elections in Italy dented investor appetite for risk. Shares in Europe's banking index <.SX7P> ended the week with a 3.4 percent loss, while British banks also suffered.

But markets have since calmed following the formation of a new Italian coalition government of two anti-establishment parties, while a rise in European bond yields has also helped banking stocks following hints from rate-setters that the ECB could announce the end of bond buying next week.

"Risk appetite has improved in general, and (the banks) are higher beta (more volatile) so they tend to benefit from that," said Mike van Dulken, head of research at Accendo Markets.

"Yes, there are still things that you can worry about if you want to, but they don't seem to be dragging on sentiment anymore," van Dulken added.

Despite worries over sectors such as retail and outsourcing, UK mid caps <.FTMC> are also in positive territory for the year.

On the day, mid-caps saw bigger moves than the FTSE.

Shares in car advertising business Auto Trader jumped 8.8 percent after the firm gave better than expected guidance in its earnings update, while outsourcer Capita rose 7.5 percent following an upgrade from Citigroup.

Alfa Financial Software surged 18.3 percent, recovering part of its losses since June 1 when a profit warning sank the stock by 41 percent.

(Reporting by Kit Rees; Editing by Jon Boyle and Mark Potter)

By Kit Rees and Helen Reid