European shares mostly closed lower on Wednesday as investors balanced the ongoing U.S. budget deadlock against the news that Janet Yellen has been nominated the next chair of the Federal Reserve.
However, Spanish and Italian stocks rallied after the countries' sovereign bonds sold well at auction, adding to improved sentiment towards the euro zone's southern economies. The IBEX 35 rose 1 percent while the FTSE MIB closed up 0.9 percent, with Caixabank and Banco Santander posting healthy gains.
The Spanish government managed to launch a 30-year bond on Wednesday for the first time in nearly five years, whilst Italy also tapped the markets with a new 7-year bond.
U.S. stocks wobbled between small gains and losses in choppy trading, as optimism over Yellen's Fed nomination was trumped by woes over the ongoing government shutdown.
Yellen is widely perceived as being dovish on monetary policy and investors expect her to take a slower path towards a reduction in the Fed's bond-buying program. The announcement on her nomination is scheduled for 3 p.m. ET (8 p.m. London time) on Wednesday.
"With Janet Yellen, you're likely to get a situation where the Fed pursues its ultra-loose monetary policy well beyond the current threshold of unemployment at 6.5 percent and ultimately pushes into higher inflation," Gabriel Stein, chief economic adviser of the Official Monetary and Financial Institutions Forum, told CNBC.
Global investor sentiment continued to be weighed down by rising concerns over a U.S. credit default with only nine days left for Congress to raise the debt limit before October 17.
At a press conference on Tuesday, President Obama said he had yet to see serious proposals from the Republicans that would allow both sides to resolve their core differences.
(Read More: US futures signal higher open for Wall Street)
"So my suggestion to the Speaker has been and will continue to be: 'Let's stop the excuses, let's take a vote in the House, and let's end this shutdown right now'...There are enough reasonable Democrats and Republicans in the house who are willing to vote 'yes' on the budget that the Senate had already passed," he said.
(Read More: US will reach solution on shutdown: ECB's Asmussen)
Back in Europe, U.K. industrial production figures for August came in worse-than-expected on Wednesday. The number fell by 1.1 percent on the month in August, the biggest drop since September 2012, after rising by 0.1 percent in July.
(Read More: UK industrial output drops)
In stocks news, shares of French telecoms company Alcatel-Lucent closed down 6.89 percent after President Francois Hollande called on the firm to save as many jobs as possible in France, after the equipment maker said it planned to cut 10,000 jobs worldwide.
Miner Vedanta Resources reported a rise in oil, gas and zinc production in the second quarter on Wednesday. But the stock closed 4.67 percent lower after it was downgraded by Morgan Stanley to "underweight".
Morgan Stanley also cut its outlook on French conglomerate Saint-Gobain to "underweight"; shares closed the day 3.65 percent lower.
Shares of U.K. homebuilder Taylor Wimpey provisionally closed up 5.16 percent after being added to Goldman Sachs' "conviction buy" list. The company has benefited recently from government stimulus for the housing market. Shares of Barratt, another homebuilder, also finished higher, up 3.59 percent, after receiving the same recommendation from Goldman.
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This version corrected Gabriel Stein's title to chief economic adviser of the Official Monetary and Financial Institutions Forum.