"Rate concerns just won't go away...the housing numbers have put pressure on the bond market," said Alan Ackerman, market strategist for Fahnestock & Co in the United States.
US housing starts jumped 4.5 percent in August to a 1.525 million annual rate against a revised 1.460 million in July, the US Commerce Department said.
Economists, who had expected starts to slip to 1.445 million against 1.455 million in July, said the strong figures pointed to an economy unlikely to slow dramatically in early 1997.
At the close of European business Wall Street was down 19.98 points at 5857.38.
The London stock market hit record highs on a wave of derivative-related trading during the morning, but renewed interest rate worries, Wall Street's weakness, and nervousness ahead of a key futures expiry on Friday pared the gains.
The FTSE 100 index, which pushed to a record high of 3,987.7 points on business related to Friday's FTSE 100 and mid-250 futures and options expiry, drifted back to end the day at 3,974.3 points, up 18.6 points.
"It's been a two-way pull. The housing data and Wall Street were not too hot but FTSE futures held up well," a trader said. French shares ended up but off their highs on profit-taking after the Bank of France shaved its intervention rate by 10 basis points to 3.25 percent. The bank's gesture, while well received, was widely expected after yesterday's 1997 budget presentation.