Britain's FTSE 100 index fell on Monday from 2-1/2 month highs struck in the previous session, with financials such as Northern Rock hit by concerns that global interest rates are heading higher.
New evidence of Britain's bullish housing market turned thoughts towards Thursday's Bank of England rate decision meeting while economists polled by Reuters last week saw a 30 percent chance of the Bank of England raising rates in August.
In the eurozone the latest inflation data cemented a widely held belief that the European Central Bank will raise rates to 3 percent on Thursday.
Concerns over rising interest rates took European equity markets off last week's 2-1/2 month highs and led the FTSE to close 46.6 points down at 5,928.3.
After last week's biggest weekly market gain since March 2003 analysts said investors were also biding their time ahead of a results and data -packed week.
"I think it's just a little bit of profit taking after the last couple of weeks recovery," said Andrew Bell, equity strategist at Rensburg Sheppards. "At the margin, the UK housing data (is) a bit stronger, so it reinforces the idea that there is probably an interest rate increase somewhere around the corner here."
A poll published by Reuters last week showed that while UK interest rates are likely to remain on hold until the end of the year, the risk of a rate rise has increased after recent unexpectedly strong economic growth and inflation data.
Results from five major British banks this week are expected to show strong profits but a big rise in bad debts is expected as more consumers struggle to pay back unsecured loans, and traders said this along with concerns over rising global interest rates was weighing on the financial sector.
Northern Rock closed down 2.7 percent and not even HSBC, which beat analysts' median forecast with an 18 percent rise in its first-half profit, managed to escape the downtrend. Shares in Europe's biggest bank closed 0.3 percent lower.
And Prudential extended last week's losses to close 2.6 percent lower. Last week the British life insurer met market expectations with a 17 percent rise in first-half profit, but weaker UK results and a loss at Internet bank Egg took the shine off strong performances by its Asian and US divisions.
British mobile phone giant Vodafone also closed down 2.4 percent, as the stock turned ex-dividend.
Property stocks took a beating with dealers citing the concern about higher interest rates after buoyant economic data, including rising house prices and British mortgage approvals at their highest in five months in June.
Property consultant Hometrack said UK house prices continued to climb in July, rising at their sharpest annual rate in 1-1/2 years, helped by growth in London.
Slough Estates closed down 2.4 percent while Liberty International dropped 2.4 percent. Meanwhile Shire Plc rebounded after easing on Friday on the back of an expected big fall in second-quarter earnings.
"All it's done is it has gotten back to levels it was at before the figures came out on Friday which was fine, very lukewarm figures," said one market maker.
Among gainers Tate & Lyle was up 2.7 percent at 6.85 pounds after news late last week that a Mexican tax on fructose could be cut this year after Mexico and the United States reached a key trade deal on sweeteners. "It's quite positive for the stock. Once it's fully digested, I think it'll consolidate above 7 pounds," one trader said.
"The bears have thrown in the towel on that now so people want to get the share price up. I think markets have the feeling that this is a changed business. In my view they're probably overstating it but the momentum is there," said an analyst.
Severn Trent also ended up nearly 2 percent on bid speculation. Shares in Pearson were 1 percent higher after the company said it was confident it could hit full-year targets.