Asian equities kicked off the week with sharp losses as emerging markets remained under pressure amid fears over a tightening in U.S. monetary policy in the run up to this week's Federal Reserve policy meeting.
(Read More: Are emerging markets on brink of another crisis?)
In late afternoon news, the Royal Bank of Scotland (RBS) said it had put aside around £3 billion ($4.95 billion) more to deal with past conduct issues. RBS will now set aside an additional £465 million to compensate customers miss-sold loan insurance and £500 million to compensate small businesses miss-sold complex interest rate hedging products.
Shares in RBS closed down around 2.2 percent on Monday.
The telecoms sector led European bourses lower, although shares of Ericsson, the world's biggest telecom network equipment maker, closed higher.
Vodafone (the third biggest company in the FTSE 100) saw its shares provisionally close lower by 9 percent after fellow telecom firm AT&T ruled out a bid for the U.K.-listed company. This led to the FTSE closing down 1.6 percent, slipping to fresh five-week lows.
Chinese credit conditions
Credit conditions in China also weighed on market sentiment, after media reports raised concerns that the People's Bank of China had halted bank cash transfers ahead of the upcoming Lunar New Year holiday, sparking fears of a nation-wide liquidity crunch.
Back in Europe, a police clash with protesters in central Kiev on Sunday further destabilized the Ukrainian government. The embattled President Viktor Yanukovich has tried to end the stand-off by offering important posts to opposition leaders, including the role of prime minister.
The Eurogroup of euro zone finance ministers met on Monday, ahead of Tuesday's meeting of the Economic and Financial Affairs Council (Ecofin), where the 28 economics and finance ministers of the European Union meet.
On the data front, German business sentiment rose in January, beating analysts' expectations, according to the latest data from Germany's Ifo Institute for Economic Research.
(Read More: 'Die hard optimist' German firms shrug off EM fears)
BG Group shares tank
German chemicals group Lanxess announced a change in CEO. Matthias Zachert, the CFO of Merck, is die to take over from Axel Heitmann, according to Dow Jones newswire. Shares of Lanxess climbed 8.2 percent.
Shares of oil and gas company BG Group closed sharply lower by 13.8 percent on Monday after the firm downgraded its guidance for its 2013 earnings.
In Italy, shares of Banco Popolare fell 14.9 percent and were suspended from trading after the lender unexpectedly announced plans for a rights issue.
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