[BENGALURU] European shares closed at two-week lows on Monday as a slump in German business morale underscored the damage from tighter Covid-19 restrictions, while investors feared a slow vaccine rollout could further delay an economic recovery.

The pan-European Stoxx 600 index reversed early gains and finished 0.8 per cent lower. The German DAX fell 1.7 per cent, France CAC 40 was down 1.6 per cent and the UK's FTSE 100 declined 0.8 per cent.

The Ifo economic institute's business climate index fell to 90.1 in January from an upwardly revised reading of 92.2 in December, while a Reuters poll had forecast a reading of 91.8.

The German economy, Europe's largest, will likely reach its pre-pandemic levels in mid-2022, according to a draft document prepared by the economy ministry, seen by Reuters.

"German Q1 GDP now looks likely to fall by at least 1 per cent q-o-q, assuming that the restrictions for retail and services will only be gradually lifted after Feb 14," Deutsche Bank's chief economist, Stefan Schneider, wrote in a note.

"Hence, our 4-1/2 per cent forecast for the year as a whole looks somewhat ambitious, but given the overall uncertainty we currently see no real need to lower it."

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Economy-linked banking, auto, oil & gas and travel & leisure stocks took the biggest hit, falling between 1.9 per cent and 3 per cent.

Markets took a turn for the worse after US drugmaker Merck said it would end development of its two Covid-19 vaccines.

Pfizer announcing delays of nearly a month to its Covid-19 vaccine shipments to the European Union earlier this month, while AstraZeneca has announced a large cut in supplies to the bloc.

British Prime Minister Boris Johnson said he was looking at toughening border quarantine rules because of the risk of "vaccine-busting" coronavirus variants.

British Airways-owner IAG, Ryanair, Lufthansa and Air France KLM fell between 3.3 per cent and 7.7 per cent, while retailers fell 1.5 per cent.

Several Spanish regions ramped up anti-coronavirus measures, while France was looking at a third national lockdown.

Technology stocks gave back early gains, but losses were modest as their US peers traded at all-time highs.

Finnish telecom equipment maker Nokia jumped 12.9 per cent, while technology investor Prosus gained 3.6 per cent to hit an all-time high.

Investors sought refuge in defensive sectors such as telecoms and healthcare which gained 0.9 per cent and 0.7 per cent, respectively.

French state-controlled power group EDF slumped 15.6 per cent to the bottom of Stoxx 600 after broadcaster BFM Business reported that the European Commission wanted a further six months of talks on a planned restructuring.

A source in the French finance ministry denied the report.

REUTERS