Europe ends down 2.5% after Chinese sell-off; DAX sinks 4.3%

European markets slumped to close sharply lower Monday following a sell-off in Chinese stocks and heightened geopolitical tensions between Iran and Saudi Arabia.

The pan-European STOXX 600 slipped to finish around 2.5 percent down with all sectors ending sharply lower.

Germany's DAX tumbled 4.3 percent, with London's FTSE and France's CAC also ending sharply lower, down 2.4 and 2.5 percent respectively.

China tanks 7%


Investors reacted to weak sentiment from China on the first day of trading of the new year. China's Shanghai Composite tanked 6.8 percent and the Shenzhen Composite plunged over 8 percent as investors cited a weakening yuan as well as weak manufacturing data out of China as the reason behind the sell-off. The price plunge spurred a trading halt during the afternoon session in China.

The Caixin December manufacturing Purchasing Managers' Index (PMI) was down 48.2 compared to the 48.6 in November.

Read MoreHappy New Year? World markets follow China Slump

Geopolitics is also weighing on sentiment. Saudi Arabia severed diplomatic and some commercial ties with Iran over the weekend after Iranian protesters stormed Saudi Arabia's embassy in Tehran Sunday, following Saudi Arabia's execution of Shiite cleric Nimr al-Nimr on Saturday.

With this influx of news, U.S. stocks traded sharply lower on Monday, not helped by the hawkish comments coming from some Federal Reserve heads, as the pace of interest rate hikes remain in focus.

"Traders will have to sit tight and fasten their belts as the first trading day of this year is not starting off which they would have imagined. It is ugly out there today and you have to be careful and the fact is that the recent hawkish tone by the Fed over in the US is making investors more nervous," Naeem Aslam, chief market analyst at AvaTrade said in a note on Monday.

Fiat tumbles, Miners sink

Ferrari began its first day of trading on the Milan stock exchange Monday, opening at 43 euros per share. The luxury carmaker closed 0.5 percent up, however, its parent Fiat Chrysler slipped 4.8 percent, after spinning off its stake in Ferrari.

The basic resources sector got little reprieve in the new year as commodity prices continued to come under pressure, especially amid concerns over the Chinese economy. Anglo American ended down over 7 percent, with Glencore and Antofagasta closing off more than 5 percent each.

A tick-up in oil prices did little to help stocks in the sector, with most trading lower, however Tullow Oil bucked the trend, with shares finishing up over 2.5 percent.

Both Brent crude and U.S. light crude were top performers throughout trade but came under pressure in late trade, with Brent trading last at $37.01 and U.S. crude at $36.60. The downside move came after reports of a rise in crude inventories at the Cushing, OK delivery point for U.S. crude's West Texas Intermediate contract, but those reports could not immediately be verified, according to Reuters.

Air France-KLM jumps 3%

Retail stocks were also under pressure with Hennes & Mauritz finished down 5.3 percent after Deutsche Bank cut its price target for the stock and gave it a "sell" rating.

Air France-KLM was the top performer on the STOXX 600, up 3.3 percent, after the company was upgraded by Bank of America Merrill Lynch.

Randgold was also a leading stock, ending up 2.4 percent, as spot gold prices rose during Monday's trade.

One the data front, Markit's final manufacturing PMI for the euro zone rose to 53.2 in December, hitting a 20-month high. It was above forecasts and above 50 which separates growth from contraction. French December manufacturing PMI rose to 51.4 and Germany's figure hit 53.2.

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