Financial services stocks bore the brunt of selling as the FTSEurofirst fell on Wednesday in response to proposals set out by French President Nicolas Sarkozy and German Chancellor Angela Merkel aimed at tackling the euro zone debt crisis.
At 1048 GMT, the FTSEurofirst 300 index of top European shares was down 0.5 percent at 964.80 points.
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"The meeting was a significant disappointment in terms of resolving the European sovereign debt crisis," Jimmy Yates, head of equities at CMC Markets, said.
"It felt like two parties protecting their own interests or underestimating the severity of the situation, rather than addressing the broader problem conclusively."
Deutsche Boerse , London Stock Exchange Group and NYSE Euronext shares traded in Paris fell up to 6 percent as Sarkozy and Merkel unveiled a plan to tax financial transactions.
UBS analysts said the tax -- often known as a Tobin tax after economist James Tobin who first suggested the measure in the early 1970s -- could have significant consequences for volumes, citing the example of Sweden in the 1990s where such a tax resulted in an 85 percent fall in volumes.
"Assuming that the proposed tax would be based on the existing EC proposal, i.e a tax of 10bps for shares and bonds and 1bps on notional of derivatives, (this) would increase trading costs by 10 to 20 fold," UBS said.
Analysts said the UK, with its huge financial services sector, would be worst hit and the most unlikely to back the proposal.
London-listed interdealer broker ICAP fell 4.0 percent on concerns the tax would hit its earnings and spread-betting firm IG Group shed 5.0 percent.
Natixis strategists said the tax in Sweden led to almost half of equity trades move to London by 1990 and was abandoned a year later as the loss in terms of business almost offset the gains.
Ireland, a major centre for funds administration in Europe, said it would insist that any such tax apply to the entire European Union rather than just euro zone members.
GROWTH CONCERNS LINGER
France and Germany also unveiled a plan for closer euro zone integration, but stopped short of raising the size of the region's rescue fund, rejecting for now the idea of a common eurozone bond and doing little to quell the rising worry over the growth outlook.
"I think the broad thrust of what they came up with is fiscally contractionary, which is driving quite a bit of the move in stocks," Cormac Leech, banks analyst at Canaccord Genuity said, citing the call for fiscally-adjusted balanced budgets for euro zone members as the region struggles to maintain growth.
In a sign the Bank of England sees the economic outlook worsening, its minutes showed two policymakers had backed down from their argument to raise interest rates, while others considered another round of quantitative easing.
Around Europe, the UK's FTSE 100 index was down 0.8 percent, Germany's DAX index was down 1.1 percent and France's CAC 40 eased 0.1 percent.
Recent volatile markets and the lack of visibility on the economic outlook have resulted in investors heavily punishing companies that report poor earnings or a weak outlook.
Carlsberg , which traded almost four times its average 30-day volume, lost 14 percent and hit the lowest level since February 2010 after the Danish brewer posted a drop in second-quarter profit and more than halved its full-year growth prospects.
Swiss dental implant makers Nobel Biocare and Strauman Holdings fell 3.4 and 3.7 percent respectively, after Morgan Stanley cut its ratings on the two stocks to "underweight".
And Swisscom AG shed 1.7 percent as Credit Suisse downgraded its rating and earnings forecasts on the Swiss phone company, citing growth concerns.
Investors, however, have been strongly rewarding companies that have managed to beat expectations, with shares of Danish wind turbine maker Vestas surging 22.3 percent in heavy volume.