[LONDON] European shares fell on Monday, giving up their earlier gains as losses in Spain and a rise in the euro weighed on the region's stock markets.
The pan-European FTSEurofirst 300 index ended down 1.2 per cent, while the euro zone's blue-chip Euro STOXX 50 also declined by 1.5 per cent.
Britain's FTSE 100 fell 0.3 per cent and Germany's DAX retreated 1 per cent.
Spain's IBEX equity index was the worst performer, falling 3.6 per cent after an inconclusive Spanish election result, while Spanish 10-year government bond yields also hit one-month highs after the election.
Shares in Spanish banks fell sharply, with Caixabank dropping 7.4 per cent while Santander shed 4.9 per cent.
Neither Prime Minister Mariano Rajoy's conservatives nor left-wing parties won a clear mandate to govern in Sunday's poll, casting further uncertainty over the outlook for Spain's reform programme and broader economy. Talks on forming a coalition government are expected to take weeks.
"The Spanish election has added to some year-end nervousness among investors," said Caroline Vincent, European equities fund manager at Cavendish Asset Management.
A rise in the euro against the US dollar also weighed on European shares, since a stronger euro can make it harder for European companies to export goods overseas.
The dollar fell against the euro after data from the Chicago Federal Reserve suggested the US economy grew at a below average pace in November before the Federal Reserve raised interest rates last week.
Some fund managers remained relatively upbeat on the prospects for European shares next year, in spite of political uncertainty in countries such as Spain and Greece.
The FTSEurofirst and Euro STOXX 50 are both up around 2 per cent since the start of 2015, with economic stimulus measures from the European Central Bank having helped support stock markets in spite of headwinds such as a slowdown in China and the challenges in Spain.
"I would not expect Spain to outperform, but I do not expect this to damage the European equity story," said Kevin Lilley, fund manager of the Old Mutual European Equity Fund.
"Europe is benefiting from several stimuli: European Central Bank quantitative easing, the lower euro which helps exports, and the lower oil price which puts money in consumers' pockets."