The blue-chip FTSE 100 closed down 0.5%.

British banking and insurance stocks fell the most, echoing a weak mood among European financial stocks after the ECB held rates at a record high as expected but pointed to rate cuts commencing soon.

The UK banks index fell 2.7%, recording its biggest percentage drop in almost two months.

Several heavyweights including Aviva, Lloyds Banking Group and Reckitt Benckiser also fell as they traded without entitlement for dividend.

"While inflation in other parts of the world has been surprising to the downside, U.S. inflation seems to be accelerating, and the question of who will ease policies first remains a key concern," Alejandra Grindal, chief economist at Ned Davis Research, said.

"The positive news is that equities have, on average, shown similar gains a year after the first rate cut, regardless of whether it was initiated by the Fed or another central bank."

Global equity markets have been choppy this week as investors pondered the outlook for global rates after hotter-than-expected U.S. inflation data tempered expectations the Federal Reserve would cut rates several times this year.

Eyes will be on Friday's UK GDP figures as well as inflation and labour market data that could shape expectations around when the Bank of England (BoE) will start cutting rates.

Traders are currently pricing interest rate cuts of 43 basis points from the BoE by the end of 2024, and see the first cut coming in August.

In corporate updates, Darktrace surged 6.3% after the cybersecurity company raised its annual revenue and margin forecasts for the third time this year.

Lok'NStore jumped 16.4% to an all-time high after rival Shurgard agreed to acquire the self-storage company in a deal valued at 378 million pounds ($474 million).

AstraZeneca gained 2.1% after the drugmaker said it intends to increase annual dividend for 2024, betting on strong performance and cash generation.

(Reporting by Pranav Kashyap in Bengaluru; Editing by Shounak Dasgupta, Varun H K and Andrew Heavens)

By Khushi Singh, Pranav Kashyap and Sruthi Shankar