Europe shares sink; banks suffer; DAX down 1.8%

European shares closed sharply lower on Wednesday, with investors shunning banking stocks after regulators announced penalties for the alleged manipulation of foreign exchange markets.

The pan-European FTSEurofirst 300 ended the day provisionally 1.2 percent lower, with the German DAX ending around 1.8 percent lower and the French CAC slipping 1.6 percent.

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IBEX 35
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U.S. and U.K. regulators hit five banks with fines on Wednesday—RBS, HSBC, Citibank, JPMorgan Chase and UBS. The latter bank was was also fined by Swiss regulators.

The European banks that were fined all closed lower, as did Barclays, which U.K. regulators said they would continue to investigate.

Read MoreWatchdogs impose $3.4B fines in bank forex probe

Heavyweight banking stocks weighed on benchmarks, with Barclays closing down over 2 percent. RBS shares ended around 0.9 percent lower and HSBC was 0.3 percent down.

The sector was also weighed down by a weak performance in banks in peripheral Europe. Shares of Banco Populare and Banco Populare Milano both declined after the Italian banks posted nine-month figures on Wednesday. Italian lender Unicredit and a number of Greek banks lost around 5 percent.

BoE report

Asset manager Aberdeen Asset Management was a big loser on the U.K.'s FTSE 100, closing down around 4.2 percent.

Earlier in the day, the Bank of England (BoE) warned that U.K. price growth was likely to fall below 1 percent over the next six months on Wednesday, amid "significant risks" to its inflation projections.

In its latest assessment on the country's economy, the central bank said: "Inflation is expected to remain below the target in the near term, and is more likely than not to fall temporarily below 1 percent at some point over the next six months."

Read MoreBank of England: Inflation likely to fall below 1%

Meanwhile, U.K. monthly unemployment figures were published on Wednesday morning which showed the jobless rate unchanged at 6 percent versus a 5.9 percent forecast.

Read MoreUK unemployment rate unchanged

In the euro zone, fresh industrial production figures for September showed a monthly rise of 0.6 percent, according to Eurostat, which was lower than market forecasts for a 0.7 percent uptick.

Earnings in focus

In earnings news, U.K. supermarket group J Sainsbury shares fell after it reported a 6.3 percent drop in underlying pre-tax profit for the first half of the year. The company also kept its interim dividend at 5.0 pence per share and said it was planning to increase its non-food space in supermarkets and will roll out clothing online in 2015. Stock ended down around 1.1 percent.

Burberry shares fell to close 1.5 percent after the luxury brand highlighted a tough environment despite seeing a revenue rise in the first half of the year and upping its interim dividend by 10 percent.

The German postal and logistics company Deutsche Post slipped to close more than 3 percent down after missing expectations for its third quarter profit on Wednesday. The company reported earnings before interest and taxes of 677 million euros in the quarter, versus expectations in a Reuters poll of 691 million euros.

Shares of security services company G4S were also in focus on Wednesday, after a press releasewhich is believed to be a hoaxsaid the group needed to restate its accounts for 2013 and the first half of 2014. Shares in the company were unaffected, ending up over 2 percent.

Read MoreG4S accounts focus of suspected hoax