European Shares Hit Two-Week Low as China Overshadows Earnings

European equities began the week on a downbeat note, hitting a two-week low and heading for their fifth straight daily fall as worries over China's growth prospects overshadowed some forecast-beating corporate results.

A slightly better-than-expected July reading from the German IFO business climate index helped ease some of the sell-off. But market tremors rippled through the region after Chinese stocks suffered their biggest one-day loss in eight years and broader Asian markets retreated by more than 1 percent.

The FTSEurofirst 300 index was down 1.2 percent at 1,546.01 points by 1038 GMT after falling to 1,540.51, the lowest since July 10.

"Most of the fall is coming from China ... European markets are getting hit," said Markus Huber, trader at brokerage Peregrine & Black. "I think a lot of people have the view that China is going to continue to slow down and that slowdown is not really priced into European markets at the moment."

Benchmark share indexes in Paris and Frankfurt were broadly in line, but UK stocks outperformed slightly, with the battered mining sector staging a rebound after a volatile week despite metals prices languishing near multi-year lows.

JPMorgan strategists meanwhile said they were staying overweight on euro-zone equities. "Improving (economic) fundamentals are likely to take centre stage again," they wrote in a note to clients.

Investors focused on a two-day meeting of the Federal Reserve starting on Tuesday for hints about the timing of a U.S. rate hike. Expectations of a hike have helped the dollar, hitting commodities that are generally priced in the greenback. A stronger dollar makes commodities costlier for holders of other currencies.

"Although the Fed has two explicit mandates -- inflation and unemployment -- they are going to be wary of what's happening in the wider global environment, including in China. That will no doubt influence the scale of the U.S. rate rises," Oliver Wallin, investment director at Octopus Investments, said.

"There has been suspicion for some time that all is not as good as it seems in China. We are 'underweight' on emerging markets and have a feeling that there is more value to be found in the developed markets."

Chinese shares tumbled more than 8 percent on Monday as an unprecedented government rescue effort to prop up valuations abruptly ran out of steam. The slump came after a survey showed on Friday that China's factory sector contracted in July by the greatest amount for 15 months.

Shares of Swiss bank UBS slid 1 percent in line with the wider market sell-off despite reporting a forecast-beating set of quarterly profits.

French car parts maker Valeo also fell 4 percent despite raising its profit outlook and playing down the impact of a Chinese market slowdown.

Dutch company Philips was a top performer after a strong quarter, with its shares rising more than 3 percent. The company's chief executive warned however that China was "really slowing down".

Theme-park operator Merlin Entertainment suffered its worst one-day fall ever after warning on annual profits, following the temporary closure of its Alton Towers theme park after a roller-coaster crash in June. (Editing by Mark Heinrich)