Fiscal cliff remains key driver in markets
Earlier, markets had been buoyed by rising hopes of an imminent breakthrough in the budget talks. Failure to agree a deal could push the world's largest economy back into recession and potentially sink the global economic recovery.
European markets remained in positive territory but investors failed to add to the earlier gains.
The FTSE 100 index of leading British shares closed up 0.2 percent at 5,901.42 while Germany's DAX rose 1.1 percent to 7,534.54. The CAC-40 in France ended 0.3 percent higher at 3,601.65.
Italy's FTSE MIB underperformed, trading 0.8 percent lower after Silvio Berlusconi's center-right party pulled its support for the government of Premier Mario Monti, raising questions over its future and the progress of its economic reform program.
In the U.S., the Dow Jones industrial average was up 0.2 percent at 13,057 while the broader S&P 500 index rose 0.3 percent to 1,413.
As well as monitoring U.S. budget developments, investors are positioning themselves for Friday's U.S. jobs data, which often set the market tone for a week or two after its release.
This time the impact may be less pronounced, analysts said, as the figures for November are likely to have been heavily impacted by Superstorm Sandy, which battered the Eastern Seaboard in late October.
The effect of hurricane Sandy are likely to be seen in the reading and
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