The domestically focussed FTSE 250, considered a barometer for Brexit sentiment, sank 1.5%, while the blue-chip FTSE 100 slipped 0.5%.
Prime Minister Boris Johnson and the head of the European Commission are set to discuss Brexit negotiations on Wednesday afternoon ahead of the EU summit on Oct. 15, while the German Europe minister said the EU will have to step up preparations for a no-deal possibility.
Sentiment was also hit by news that Johnson & Johnson had paused its COVID-19 vaccine candidate clinical trials due to an unexplained illness in a study participant, delaying a high-profile effort to contain the global pandemic.
"Because of how important the vaccine would be for various economies, a delay in that would mean possibly having to live with the virus for longer and maybe more negative economic outlook," said Simona Gambarini, markets economist at Capital Economics.
Signs of progress on a COVID-19 vaccine and a raft of global stimulus have helped UK equity benchmarks rise from their coronavirus-driven lows in March, but they have lagged their U.S. and European peers as data points to a slowing domestic economic recovery.
Figures on Tuesday showed Britain's unemployment rate rose more than expected in the three months to August to its highest in more than three years and new restrictions announced on Monday are likely to make that level worse, analysts said.
Separate surveys showed British consumers ramped up their spending sharply last month, while grocery sales growth accelerated in September.
Shares of Tesco Plc and WM Morrison Supermarkets Plc closed up more than 1%.
In company news, clothing retailer French Connection Group Plc tumbled 19.6% after posting a plunge in first-half sales due to the health crisis.
(Reporting by Devik Jain in Bengaluru; Editing by Arun Koyyur and Lisa Shumaker)
By Devik Jain