European shares closed lower Monday, as a drop in German business sentiment and fresh worries over Spain and Greece pushed nervous investors towards more defensive equity sectors such as health-care stocks.
The FTSEurofirst 300 index closed down 0.3 percent at 1,115.86 points. The euro zone Euro STOXX 50 index fell 0.7 percent to 2,557.89 points, curbing a two-month rally.
German business sentiment dropped for a fifth straight month in September to its lowest since early 2010, showing that even the strongest of Europe's economies is succumbing to a downturn despite pledges of fresh stimulus measures by European Central Bank head Mario Draghi.
The euro fell on the news and the German DAX index ended lower with other European indexes following.
Carsten Brzeski, Senior Economist at Capital Economics said in a research note that the survey shows that German companies remain skeptical about the economic impact of Mario Draghi's bond-buying program.
"Despite fears of a looming euro zone break-up clearly fading away, German businesses are downscaling their expectations," he said. "It looks as if German businesses realize that keeping the euro zone alive alone will not return growth quickly. The structural adjustments in Germany's euro zone trading partners will take time and will dampen demand for German products."
A report in the German magazine Der Spiegel on Saturday that euro zone governments wanted to leverage Europe's permanent bailout fund, the ESM, to a total capacity of more than 2 trillion euros, a similar arrangement to its predecessor the EFSF continued to draw attention on Monday.
Reuters reported on Monday that Germany's finance ministry said talk of the euro zone's permanent bailout fund being leveraged to 2 trillion euros via private sector involvement was not realistic, adding that any discussion of precise figures was "purely abstract."
Spain was also back in the spotlight. The country is preparing to present its budget to parliament on Thursday and releases bank audit results on Friday, just as Spanish banks and brokerages warn that Spain will not meet its deficit targets for 2012. Adding pressure is a credit review by ratings agency Moody's that could see Spanish debt downgraded.
"We have been surprised by the rebound (in equities) and by the extent of the rebound. Now we are back to the reality. None of the problems have really been solved despite Draghi's intervention," said Cyrille Urfer, head of asset allocation at Swiss bank Gonet.
In stocks news, drilling contractor Transocean saw its shares move 3 percent higher with news from Reuters last week that the firm is trying to overhaul an injunction barring it from working in Brazil.
Basic resources firms and banks were the biggest losers on Monday, Anglo American , Glencore and Eurasian National Resources were all in down. Stock in financials such as Commerzbank, Banca Popolare di Sondrio , Unione di Banche and the Royal Bank of Scotland also fell.
Shares in mining group Bumi were down 21.6 percent with Reuters reporting that its biggest shareholder has started an investigation into potential financial irregularities at its Indonesian unit.
Trade in shares of struggling U.K. sports retailer JJB Sports was suspended on Mondayafter it said it had appointed administrators to undertake a potential sale of its assets.
Mergers and Acquisitions
Aerospace and defense giants EADS and BAE Systems , in merger discussions, are set to ask for an extension to the October 10 deadline due to “political differences” slowing talks, according to the U.K.'s Daily Telegraph newspaper.
BP is reported to be close to selling its 50 percent stake in Russian joint venture TNK-BP to Rosneft , the Russian state-owned oil company. As part of the deal, BP is reported to be planning to take a minority stake in Rosneft.
The oil giant is also planning to appoint a Russian director to its board for the first time in its 104-year history to secure the deal, according to the Sunday Times.