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European stocks ended mostly in the red on Monday as investors reacted to European banking stress tests while digesting new manufacturing data and corporate earnings from Europe.
The pan-European STOXX 600 came off session lows to close down 0.59 percent provisionally, with most sectors finishing in the red.
European investors have been analyzing the results of the European Banking Authority's latest stress tests.
The EBA found that Italy's Banca Monte dei Paschi di Siena (BMPS), the world's oldest bank, would have the greatest difficulty out of 51 of Europe's top banks covering its toxic loans between now and 2018 in adverse economic conditions. Other banks that performed poorly in the stress tests were Austria's Raiffeisen, Allied Irish Banks and Spain's Banco Popular.
Banking shares were higher in early trade but reversed gains, with most lenders trading in the red. BMPS shares finished in positive territory, but paring most of its gains—up 0.58 percent—after it unveiled a rescue plan after the close on Friday that involved raising capital from the private sector.
UniCredit, which was flagged up as a concern during the stress tests, was the STOXX 600's worst performer and was briefly halted from trade, ending down 9.4 percent. Other Italian lenders, UBI Banca, Banca Popolare di Milano and BP Emilia were all off more than 5.5 percent by the close, at the bottom of Europe's benchmarks
Some investors have expressed concern about how clear a picture the stress tests painted of the European banking sector given that they didn't test certain scenarios such as a negative interest rate environment.
"When you have a test that doesn't even take into account the effect of the current environment of a prolonged period of negative interest rates then you have to question their efficacy," Michael Hewson, chief market analyst at CMC Markets, told CNBC by email.
"Markets appear to be rallying [in early trade] on the basis that the tests on the whole didn't paint an immediate doomsday scenario, however the proof of the pudding is likely to be whether the gains seen in this initial relief rally are sustained over the next few weeks."
Elsewhere, European investors took note of the U.K. and the euro zone's latest set of manufacturing PMIs, with activity falling in both regions.
The U.K.'s manufacturing activity dropped to its lowest level in over three years, with the Markit/CIPS UK manufacturing purchasing managers' index coming in at 48.2 percent in July – down from 52.4 in June. Meanwhile, manufacturing growth in the euro zone edged lower in July, coming in at 52.0.
Market-watchers also digested the latest slowdown in manufacturing activity in China where the official manufacturing PMI came in at 49.9 in July versus a Reuters poll that predicted a 50.0 reading. The 50-point mark separates expansion from contraction. A private survey of small-to-medium sized companies, released after the official PMI numbers, showed an expansion in activity, however.
Overseas, Asia closed mostly higher however Chinese indexes came under pressure following the country's PMI data, while the U.S. traded higher at Europe's close as investors digested earnings and economic data.
Oil was another key market mover for investors, with crude prices falling around 3 percent at Europe's market close, as increases in OPEC production and U.S. oil rig additions weighed on sentiment. Brent and U.S. WTI were sharply lower, hovering around $42.19 and $40.32 respectively at 16.30 p.m. London time.
On the earnings front, Porsche reported a fall in first-half profit year-on-year, with shares closing down 1.7 percent as a result, despite earlier gains.
Beer giant Heineken reported a 6.8 percent rise in net profit before exceptional items in the first six months of the year, but shares finished down 3.7 percent.
Meanwhile, Legrand rose to the top, closing up just shy of 4 percent following a robust set of results from the French group, which showed sales growth in the first six months beat forecasts.
Anglo American popped 2.2 percent, after RBC raised its outlook from "sector perform" to "outperform". Safran also jumped 2 percent, after Bernstein and Barclays raised their price targets on the stock.
In the red however was Thomas Cook, off 5.5 percent after Berenberg cut its price target on the stock; while fellow London-listed stock IAG finished lower, after Qatar Airways announced it had lifted its stake in the British-Airways owner to 20 percent.