Oils and energy stocks fell, with some investors moving out of the sector due to declining crude prices . Crude was up 0.5 percent on Monday, but has fallen more than 21 percent in past six weeks, including a 5.4 percent drop on Friday.

The DJ Stoxx European oil and gas index <.SXEP> was down 0.3 percent, while Total fell 1 percent and Royal Dutch Shell lost 0.4 percent.

Commerzbank declined nearly 1 percent and Dresdner’s owner Allianz rose 1.3 percent after sources close to the matter told Reuters that Commerzbank was racing to buy Dresdner by the end of this week.

"Commerzbank needs to integrate (Dresdner) and experience shows that this can be rather difficult," said a trader, who said the sale would be a relief for Allianz.

Among other movers, spoting goods maker Adidas fell 1.9 percent to top German losers as the focus on the stock faded with the end of the Olympic Games in Beijing. The shares are 10 percent off levels hit two weeks ago soon after the start of the Games.

Investors also kept an eye on the interest rates outlook for near-term market direction.

U.S. Federal Reserve Chairman Ben Bernanke said on Friday that the stronger dollar and lower oil prices, along with the weak economy, should curb inflation, in a hint that interest rates would stay on hold, though he warned the inflation outlook was "highly uncertain".

Across Europe, Germany’s DAX <.GDAXI> was down 0.2 percent and France’s CAC <.FCHI> was down 0.5 percent.

BATTERED MARKET

Shares have been battered by a global credit crisis stemming from a collapse in risky U.S. mortgages, which has slowed the economy and threatens to hit corporate profits further in the second half.

Underlining the difficulties faced by banks in particular, Denmark’s central bank and a vehicle of the Danish financial sector are to buy out Roskilde because no other offers, foreign or domestic, had been received for the bank.

Shares in Roskilde were suspended.

Airlines were in focus after Lufthansa formally announced its interest in acquiring a stake on offer in Austrian Airlines . Lufthansa fell 0.4 percent and Austrian jumped 9 percent. Stock in another possible buyer, Air France-KLM , fell 1.2 percent.

Analysts said that the weak European economy would take its toll on earnings, but added that stocks had been battered so much -- the FTSEurofirst is down more than 22 percent this year -- that it would make little difference to share prices.

"We will probably have more earnings disappointments in Q3 and Q4, especially compared to bottom-up analysts’ forecasts," said Tuomas Komulainen, Helsinki-based strategist at Danske Market Securities, adding that cyclicals would be worst hit by Europe’s slowing economy.

"But they are not a major factor any more as prices already discount them," he said.

With little scheduled on the corporate front, investors will train their sights on U.S. home sales data due at 1400 GMT.

(Additional reporting by Sitaraman Shankar in London and Kirsti Knolle in Frankfurt; editing by Rory Channing)