European stocks ended mostly in the red Monday, but off earlier lows caused by a surprise 4.7 percent drop in US new home sales, which left the bears firmly in control ahead of the Federal Reserve's interest-rate meeting. The fallout from Societe Generale's massive trading scandal and a fresh writedown from Fortis kept investors wary of further banking losses.
Fed funds futures traders are banking on another rate cut by the Fed on Wednesday -- following last week's emergency cut of 75 basis points -- with the market pricing in a 78 percent chance of a further half-point easing.
Fed Chairman Ben Bernanke is grappling with the prospect of a U.S. recession amid criticism that the central bank is reacting too much to drops in the stock market and speculation that the Federal Open Market Committee was forced to cut rates by SocGen's massive sale last Monday to unwind positions created by a rogue trader.
Shares of SocGen fell 3.8 percent after the bank revised its loss allegedly caused by Jerome Kerviel to 4.82 billion euros ($7.08 billion) from 4.9 billion and French Economy Minister Christine Lagarde said the bank was not under any pressure to merge. Citigroup downgraded the stock to "sell" from "buy," saying that the company's black box money management system had been discredited.
Also in the banking sector, shares of Dutch bank Fortis rebounded 8.3 percent after it said it could suffer $1.5 billion in subprime related writedowns. Shares of ING and Fortis fell sharply on Friday on speculation of further writedowns among the AEX listed banks. ING shares closed 1.9 percent higher.
In Switzerland, Credit Suisse lost 1 percent, despite a report that Qatar may buy a 5 percent stake in the company.
And Deutsche Bank lost 0.3 percent after saying it will review its risk management operations in the wake of the Credit Suisse scandal.
As well as banks, mining shares were among the biggest losers, with Anglo American down 4.8 percent and Rio Tinto down 3.1 percent.
Investors in Germany also grappled with the impact of Sunday's elections in Hesse and Lower Saxony, where voters turned against Chancellor Angela Merkel's Christian Democratic Party.
In London, drug maker Shire led losses on the FTSE-100, falling 4.4 percent, after Sanford Bernstein cut the stock to "underperform" from "market perform," citing slow initial sales of children's attention deficit disorder treatment Vyvanse.
-- Reuters contributed to this report