Banking stocks held European shares below 4-1/2 years highs on Monday, depressed by a worsening outlook for Italy's public finances.
The shed 0.8 percent, as a downgrade of Italy's sovereign debt rating late on Friday triggered a sell-off in the country's banks, which own much of Rome's public debt. Fitch reduced Italy's credit rating to triple-B positive, citing political uncertainty as the key reason for the downgrade.
In a statement, Fitch said: "The inconclusive results of the Italian parliamentary elections on February 24-25 make it unlikely that a stable new government can be formed in the next few weeks." It added that the political situation was a "non-conducive backdrop" for further structural reform measures.
Milan-listed Mediobanca, BP Emilia and Banco Popolare led sector fallers, shedding between 3 percent and 5 percent, after Fitch warned that inconclusive elections last month threatened to delay much-needed economic reforms.
"Everyone I talk to wants to steer clear of Italy until there is clarity on the political situation," one senior pan-European trader in Milan said.
"Banks are hit first but I think that, slowly but surely, everything will come off."
The banks capped gains on the pan-European FTSEurofirst 300 Index, which provisionally closed flat at 1,194.83 points, keeping below a high of 1,197.73 hit on Friday and previously not seen since 2008.
On Monday, Germany reported trade balance data showing the surplus had narrowed in the month of January. The figure for exports pushed higher by 1.4 percent in seasonally adjusted terms, which was the biggest increase in five months.
In France, industrial production data showed a slump in January with output falling 1.2 percent month-on-month.
Revised figures in Greece for gross domestic product (GDP) were released on Monday. For the fourth-quarter of 2012, GDP contracted by 5.7 percent year-on-year, slightly better than a previous flash estimate.