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London: European shares fell on Monday, as a drop in German business sentiment and fresh worries over Spain and Greece pushed nervous investors towards more defensive equity sectors such as healthcare stocks.

The FTSEurofirst 300 index provisionally closed down 0.3% at 1,115.86 points. The euro zone Euro STOXX 50 index fell 0.7% to 2,557.89 points, curbing a two-month rally.

German business sentiment dropped for a fifth straight month in September to its lowest since early 2010, showing that even the strongest of Europe’s economies is succumbing to a downturn despite pledges of fresh stimulus measures by European Central Bank head Mario Draghi.

Spain is facing increasing pressure for a further bailout, while a German media report that Greece may have a 20 billion euro hole in its state budget also unnerved investors.

“We have been surprised by the rebound (in equities) and by the extent of the rebound. Now we are back to the reality. None of the problems have really been solved despite Draghi’s intervention," said Cyrille Urfer, head of asset allocation at Swiss bank Gonet. (Reporting by Sudip Kar-Gupta; Editing by Toni Vorobyova)

Euro zone banks shed 0.6%, with Spain’s Bankia and Banco De Sabadell the top fallers at 1.9% and 1.7%, respectively.

In a sign of investor reluctance to add to a recent rally fuelled by central bank interventions, the FTSEurofirst 300 stopped short new 14-month highs on Friday and trimmed gains in late trade to end broadly flat for the week, which had been marked by soft data from Europe and China.

The index has thus far failed to break above its July 2011 high of 1,130.

“(The sideways market is set to continue) most likely until we get more information on the Spanish issue," said Ishaq Siddiqi, a strategist at ETX Capital, citing structural reforms expected from Madrid on Thursday.

“The liquidity rally looks like it’s over and global growth worries are back on the agenda. It’s a very light day on the whole so it’s difficult to say today is going to be the day we see a change in price action."

He flagged the Ifo index, which is expected to show business morale edging up in September while the number of people out of work likely rose as economic growth slows, according to a Reuters poll.

The euro zone Euro STOXX 50 index, down 0.5% at 2,565.59, has risen nearly 20% since late July, boosted by the prospect of interventions by the European Central Bank and the US Federal Reserve to shore up debt markets and the economy.

Charts on the index December futures, down 0.2% at 2,557 points, suggested profit taking may ensue if the index breaks below its mid-September low.

“On a break of 2,523 we’d look for a pullback," technical analysis firm Futures Techs said in a note.

“There are plenty of things pointing towards this being the next tradeable move (and an early September low of) 2,425 is the next bold support to target." Reuters

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