Europe Shares Close Lower After US GDP Disappoints

European shares suffered their biggest daily drop this month after gloomy earnings and weak U.S. economic data hit sentiment on Wednesday and left some positioning for further falls in the near-term.

A profit warning from Saipem caused shares in Europe's biggest oil services company to fall 34.3 percent and sent shockwaves through the oil & gas sector. Imperial Tobacco, meanwhile, shed 3.9 percent after guiding for lower profits. They both weighed on the pan-European FTSEurofirst 300 Index, which provisionally closed 0.6 percent lower at 1,170.78 points -- retreating from 2-year highs hit the day before and chalking up the worst daily loss since Dec.28.

It does, however, remain on course to record its best month since July last year.

The index extended losses in the afternoon as data showed the U.S. economy unexpectedly contracted in the fourth quarter, suffering its first decline since the recession ended more than three years ago.

"Surely this is a little bit of a wake up call to this never-ending market rally," Dermot Corrigan, head of derivatives trading firm Qubed Derivatives,said. "The (cash) market is well overbought, so a correction would be healthy."

Spain's economy sank deeper into recession in the fourth quarter of 2012. Meanwhile, Switzerland's leading indicator data showed economic momentum slowed more than expected in January. The data prompted profit taking in the European banking sector.

Other economic data released on Wednesday included euro zone business climate which was less gloomy, at -1.09 for January versus -1.11 for December. Economic sentiment figures were positive, with a rise to 89.2 in January against a revised 87.8 in December.

A bond auction by the Italian treasury wasn't enough to cheer the mood, despite 10-year benchmark bond yields falling to their lowest since October 2010.