Spanish bank Santander Central Hispano led European shares down yesterday, pushing the FTSE Eurotop 300 index into negative territory for this year as optimism over economic recovery and second-half profits faded.
The index ended down 0.9 per cent at 957.01 points, with four issues falling for each one that rose, while volume was meagre.
This was the first close in negative territory so far this year for the benchmark index of Europe's top 300 blue chips, leaving it within striking distance of 951.95 points, its intra-day trough for the year.
Santander ended off 2.6 per cent at €7.8 after Spain's biggest bank struck Europe's biggest cross-border bank takeover by agreeing to buy Britain's Abbey National for about £8 billion.
Shares in Abbey sank 4 per cent to 557 pence on dismay over the cash terms of the deal and the prospects for the combined group.
"This isn't a great business they are taking over. It's a reasonably well-known name, but it's a tired business," said Framlington Asset Management's financial stocks fund manager, Richard Peirson.
Concern about possible pricey counter-bids triggered selling in other UK banking shares, with Barclays, HBOS and Lloyds TSB among Europe's top blue-chip decliners.
Many investors also opted to wait for key economic data due later in the week.
Investors have a less optimistic view of the world and are making moves to ensure their portfolios are more defensive by switching out of technology and into utilities and drug firms, which will continue to undermine the market, said Michael O'Sullivan, a strategist at State Street Global Advisors.
Technology, telecoms and media, which are typically riskier areas of the market, continue to be dumped in favour of the defensive groups, which offer more predictable returns.
"There is no respite in sight. I suspect there is another couple of per cent on the downside to go," Mr O'Sullivan said.
The DJ Euro Stoxx 50 index fell 1.2 per cent to end at 2,640.61 points.
Analysts said investors may choose to wait before dipping back into the market, even though valuations look cheap.
"The main event this week won't occur until Friday in the shape of the US second-quarter GDP report," said David Brown, chief European economist at Bear Stearns.
The market will look for indications whether inflation is speeding up and putting pressure on the Federal Reserve to raise interest rates again soon, or whether the world's top economy has begun to slow and dampen the outlook for corporate profits.