European shares finished in the red after U.S. Treasury Secretary Henry Paulson said the housing market troubles will take "some penalty" on growth, but that the economy was solid.
European stocks dipped earlier in the day, after data showed growth in U.S. factory activity slipped in November for the fifth straight month.
Fears about the credit crunch returned to the market before Paulson's comments on the subprime mortgages crisis.
The U.S. Treasury is close to reaching a deal to help struggling homeowners and prevent foreclosures and sales which could drive down property prices, Paulson said in a speech at a housing forum in Washington.
U.S. stocks erased earlier losses during Paulson's speech, with investors hopeful that the state's intervention will help the struggling housing sector rebound and will prevent a spillover into the broader economy.
But some analysts say the plan does not go far enough to alleviate fears.
"Ultimately, the impact on the crisis is going to be relatively limited, because the program as it stands would help mainly borrowers who can afford payments," David Woo, from Barclays Capital, told "European Closing Bell."
More Warnings
Earlier in the day, European Economic and Monetary Affairs Commissioner Joaquin Almunia said market conditions are likely to tighten further as financial institutions "come to terms with significant losses," causing shares to dip briefly.
The banking sector was trading lower, with shares in troubled Northern Rock sinking more than 6 percent after a report Sunday thatDeutsche Bank is ready to pull funding for Virgin Group's bidfor the troubled lender.
Investors maybe hesitant to put a lot of money to work with interest-rate decisions coming from the European Central Bank and the Bank of England expected on Thursday.
"Definitely, monetary easing and how much we'll get from where is the focus," Jason Roney from Sharmac Capital told "Squawk Box."
But with strong data both in the euro zone and in Britain, the two monetary authorities are likely to stand pat this time, and start easing next year, economists say.
"The UK manufacturing PMI has, like the Eurozone measure, risen more than expected, further reducing the likelihood of a BoE rate cut this week," ING Bank economist James Knightley wrote in a market note.
"Nonetheless, the combination of a deteriorating global growth backdrop, tighter credit conditions, lagged effects of sterling strength and a long-expected housing market slowdown should cause enough concern to prompt a BoE rate cut in February," Knightley added.
Talk of Federal Reserve easing at its next meeting on December 11 has also intensified, with economists predicting rate cuts of between 75 and 100 basis points before next June.
M&A Activity Returns
The Paris CAC-40 was among the weakest of the major indexes, but shares of media company Vivendi climbed nearly 2 percent after it made a big bet in the video-game sector-- merging its gaming unit with Activision in a $9.9 billion deal -- as music sales struggle.
London's FTSE-100 was also lower, as was Germany's DAX, despite shares in investment advisor AWD soaring 28.1% after Swiss Life agreed to buy the company for $1.7 billion.
In other merger and acquisition news, Dutch staffing company Randstad said it would bid $5.17 billion for its national rival Vedior. Vedior shares ended 7.7 percent higher, but Randstad tumbled10.6 percent, suggesting investors thought the price of the deal was too high.
"If you look at an industry-changing deal like this, it's impossible to plan," Ben Noteboom, Randstad CEO, told "European Closing Bell."
"We are convinced it will create value," Noteboom added.