European Stocks Finish Lower on Banking Woes

European stocks closed down, with the banking sector the worst hit after shares of battered U.K. mortgage lender Northern Rock sank further.

The London FTSE-100 and Paris CAC-40were sharply lower, while the Frankfurt DAX was nearly flat. The FTSE CNBC Global 300 was also in negative territory.

U.S. stocks opened lower ahead of a crucial Federal Reserve decision on rates Tuesday and with investors across the ocean eyeing the turmoil in the European banking sector.

Shares of Northern Rock closed 35% lower, after plunging 40% during the session and following a 32% decline Friday. The likelihood of an independent future for the U.K. bank dwindled, but no suitors have yet come forward.

Depositors withdrew an estimated 1 billion pounds ($2 billion) from the lender over the weekend after the company requested authorization for an emergency loan from the Bank of England, and the queues in front of the mortgage lender's branches continued on Monday.

The gloom spread from banking to other sectors of the U.K. economy. "The fear here is that if the financial crisis will spill into the economy, who is going to be hurt?" Tim Hughes from IG Index told "European Closing Bell."

Wait and See

Trading was subdued in European markets, especially in Frankfurt, economists said.

"I think at the moment no one is buying, no one is selling, the volumes are very thin," Markus Jakubowski from Societe Generale told "European Closing Bell."

In corporate news, the European competition regulator won a key victory as a European Union court upheld most of its decision to fine Microsoft in 2004 and dismissed the software giant's appeal on all substantive points.

Saudi Arabia said on Monday it had signed an agreement with the British government to buy 72 Eurofighter Typhoon jets from BAE Systems for 4.43 billion pounds ($8.84 billion). BAE shares closed more than 2% lower, with the general market sentiment.

Deutsche Telekom mobile phone division T-Mobile USA has agreed to buy SunCom Wireless Holdings for about $1.6 billion. Deutsche Telekom said in a statement it would also take on SunCom debt of almost $800 million. The German company's shares finished 0.22% up in a depressed market.

Economists said that although trading was lackluster, there were still some bright spots, such as the utilities sector. "People are looking for some kind of safe haven," Jakubowski said.

Investors are likely to watch closely Tuesday's interest rate decision from the Federal Reserve and earnings from Lehman Brothers , which promise to answer questions over the future of the credit crisis.