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Sentiment also remained downbeat as investors took profits from last week's surge, which was rooted in hopes of a public spending splurge under US President Donald Trump.
"The Deutsche Bank drag on the banking sector, as well as the continued weariness following last Wednesday's record-breaking surge, continued to set the tone of trading," said analyst Connor Campbell at trading firm Spreadex.
Meanwhile, renewed political uncertainty weighed on sentiment on Wall Street.
Analysts described investor unease after President Donald Trump's unsubstantiated accusations against former president Barack Obama dominated weekend headlines.
"President Trump switching gears from a conciliatory speech to accusing Barack Obama of wiretapping unwinds some of the cross-party good feelings that could have helped pass tax and spending reform policies," said Jasper Lawler, senior market analyst at London Capital Group.
Shares in Deutsche Bank, Germany's biggest lender, dived nearly eight per cent in Frankfurt, after announcing on Sunday it would raise cash by issuing new shares.
The announcement marked a U-turn for CEO John Cryan, who until recently insisted no such move was needed.
There was fallout across the European financial sector.
Royal Bank of Scotland shares shed 2.6 per cent and Barclays gave up 1.9 per cent in London, while BNP Paribas and Societe Generale dropped 1.0 per cent and 2.0 per cent respectively in Paris.
London won a partial boost, however, after British financial services group Standard Life agreed to buy Aberdeen Asset Management for £3.8 billion (US$4.7 billion) to create one of the world's biggest fund managers.
The combined business will have a stock market capitalisation of £11 billion and oversee assets worth £660 billion - making it one of the largest investment managers in the world and the biggest in Britain.
The news sent Standard Life's share price 5.7 per cent higher, while Aberdeen stock gained 4.4 per cent.
Shares in French car manufacturer PSA revved 2.7 per cent higher after it announced the acquisition of General Motors' European subsidiary, which includes the Opel and Vauxhall brands, for €1.3 billion.
The move sees PSA regain its position as Europe's second-largest automobile manufacturer, after Germany's Volkswagen, overtaking rival French firm Renault.
Shares in GM fell 2.1 per cent in New York.
In Asia, Tokyo stocks fell and the safe-haven yen advanced after North Korea fired four missiles - three of them landing in Japanese waters - fuelling fresh geopolitical concerns.
But Asia's other markets started the week with gains after another positive lead from Wall Street and remarks by Federal Reserve boss Janet Yellen that US interest rates would more than likely be hiked this month as the economy continues to improve.
Japanese Prime Minister Shinzo Abe warned the threat from North Korea had "entered a new stage" following the missile launch, which came after Pyongyang fired a rocket last month.
Hong Kong stocks rose 0.2 per cent and Shanghai finished 0.5 per cent higher.
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