German Sentiment Data Lift European Shares
European shares were flat in a choppy session on Monday as falls in Spain on concerns about a government setback in regional elections offset a strong German economic survey.
Spain's IBEX share index fell 1.6 percent, hitting a two and a half week low, after the governing People's Party failed to secure an outright majority in elections in Andalucia.
Victory would have reinforced Prime Minister Mariano Rajoy's mandate to deepen cutbacks in public spending as he tries to drag Spain out of the euro zone debt crisis.
Spanish banks, which struggled last year partly because of the weakening economic environment and low loan growth, were the standout losers, with BBVA and Banco Santander down 2.6 percent and 2.3 percent respectively.
"The market is more negative about Spain, it has a large deficit and the election in Andalucia is causing uncertainty," said Andrea Williams, who manages $2.1 billion for Royal London Asset Management.
"Spain has got to make severe adjustments and deleverage and banks are being hit as there is no loan growth in the country."
She added that she was invested in Scandanavian banks such as DNB Nor as they are not exposed to the same sovereign risk and have loan growth.
The Italian market was also hit by worries the problems in Spain could reignite the euro zone debt crisis and see it spread to Italy, with the FTSE MIB down 0.9 percent.
Italian Prime Minister Mario Monti said on Saturday Spain had fallen behind on budget controls and he was concerned about contagion to Italy.
Investor nervousness could be seen in the Euro STOXX 50 volatility index, a key gauge of European investor fear, which rose 5.9 percent. The higher the volatility index, the lower investor appetite for risk.
By 0955 GMT, the pan-European FTSEurofirst 300 index of top shares was flat at 1,079.61 points after falling 2.5 percent last week on weak economic surveys in China and the euro zone and disappointing housing data in the United States.
But the index was holding above a support level - its 50 day moving average at 1,069 - which it hit on Friday and briefly moved higher after a gauge of German business sentiment rose.
The German Ifo index unexpectedly climbed for the fifth month in a row, suggesting Europe's largest economy was holding up after data last week suggested factory activity was weak.
"We are seeing short-term range trading, but it has moved off its 50-day moving average and I think it has the potential to move back to recent highs near the 1,100 level," said Joe Rundle, head of trading at ETX Capital.