Safe-haven assets such as gold and government bonds were in demand as the death toll from the outbreak in China rose to 81 and the virus spread to more than 10 countries including France, Japan and the United States. Some health experts questioned whether China can contain the epidemic.
The pan-European STOXX 600 slumped 1.7pc after hitting a record high in the previous session.
"With stock markets having been at or very near all-time highs before all this broke, this is a perfect selling opportunity," said Neil Wilson, chief market analyst for Markets.com.
"The problem for most investors is that this is just not a risk event they are prepared for - a true black swan in the making."
All major European subsectors were trading in the red with shares of airlines, hotels and luxury goods makers posting some of the sharpest declines as the Chinese government extended the Lunar New Year holiday.
France's CAC lagged regional bourses as luxury goods makers such as LVMH, Christian Dior, Hermes and Gucci owner Kering, which are heavily reliant on Chinese demand, fell more than 3pc.
Other companies in the luxury space such as Burberry Group Plc, Moncler SpA, Swiss watchmakers Swatch and Richemont declined between 2.7pc and 4.6pc while airport retailer Dufry AG was set for its steepest one-day drop in more than a year.
Losses in flight operators Air France, Lufthansa and British Airways-owner IAG, cruise line operator Carnival Corp, hotel group Accor and IHG pushed the travel & leisure index to a near seven-week low.
The basic resources index eyed its worst day in nearly six months hit by growth fears in China, the world's top metals consumer.
An economist at the Ifo institute said on Monday the German economy will likely grow by 0.2pc in the January to March period as the industrial sector slowly emerges from a crisis.
This week will be dominated by central bank meetings with the Federal Reserve interest rate decision due on Wednesday and the Bank of England's policy decision expected on Thursday.