[MILAN] European shares fell on Tuesday, weighed down by losses among mining and financial stocks, while Italian bank Monte dei Paschi di Siena plunged to a record low on worries about its capital strength.
The pan-European STOXX 600 index ended down 1.7 per cent, adding to losses seen on Monday, while the FTSEurofirst 300 declined by 1.5 per cent.
European stocks rose last week as expectations grew that European central banks would step in to support markets spooked by Britain's vote to leave the European Union.
But both indexes remain below levels reached before the vote, which triggered worries about the political and economic outlook for Europe, weighing particularly on peripheral countries such as Italy and financial stocks.
"All problems are still in front of us after the Brexit vote ... and investors will remain cautious before the earnings season starts in a few days," said Jerome Schupp, head of research at SYZ Asset Management in Geneva.
As Brexit concern continues to linger, HSBC equity strategist Robert Parkes said outflows from European equities were likely to continue after hitting their highest level on record in the first half of the year.
Monte dei Paschi fell 19 per cent, the biggest decline on the STOXX 600 index. Italian newspapers said the government was in talks with the European Commission about injecting capital into the bank without imposing losses on retail investors.
The European Central Bank has asked Italy's third-largest lender to slash its bad debt by 40 per cent in three years, heightening concerns that the bank may have to make a cash call at a time when investor appetite for bank stocks is low.
"Banks in Europe are a big concern for different reasons, from low interest rates to volatile markets. For Italian banks, it will take years to digest bad loans," Mr Schupp said.
Europe's bank sector index, the worst sectoral performer this year, and since the Brexit vote, dropped 2.6 per cent, although some Italian lenders turned positive after heavy losses in the previous session.
UniCredit edged up 0.7 per cent after Goldman Sachs upgraded it to "buy" from "neutral" even though the US broker said it was at high risk of contagion in the event smaller lenders failing.
Europe's STOXX 600 Insurance and Financial Services indexes led sectoral decliners with falls of 3.8 per cent and 3.6 per cent respectively. London-listed insurance companies Legal & General and Prudential were among the biggest fallers, while Standard Life fell 5.2 per cent after it suspended trading in its UK real estate fund.
UK housebuilders fell after data showed Britain's construction industry suffered its worst contraction in seven years in June as concerns over the Brexit vote intensified. Shares in Barratt Development, Taylor Wimpey and Berkeley Group were down between 6 and 9 per cent.
Europe's STOXX 600 Basic Resources index, which contains major mining stocks, also fell more than 3 per cent, as copper prices eased from a two-month peak on concerns over Chinese demand.