MILAN/LONDON: European shares fell on Monday, led lower by shares in Portugal, where an agreement between leftist parties to work together to form a government unnerved investors.
Portugal's PSI 20 index fell 3.1 percent, underperforming a 0.4 percent dip for the FTSEurofirst 300 .
Two small far-left parties have concluded talks with the moderate Socialists to create an alternative government and oust the centre-right, whose prime minister acknowledged he could be forced into opposition.
More than 100 entrepreneurs have signed a manifesto arguing that uncertainty was compromising investment, balance sheets and jobs. The would-be partners also reject some reforms imposed to escape a debt crisis.
Portuguese sovereign bond yields reached a four-month high, with banks bearing the brunt of the stock sell-off. Banif fell 7.1 percent and Banco Comercial Portugues dropped 6.1 percent.
"Whiffs of crisis seem to be returning to Portugal ... but we maintain a constructive outlook for the medium term," strategists at Credit Suisse said in a note.
"Any market volatility created by Portugal's political situation should be, however, contained, thanks to QE and to the presence of European monitoring. Moreover, Portugal is no longer in an extreme economic and financial situation."
The FTSEurofirst 300 remains up 12.9 percent since lows hit in November, buoyed by the prospect of further stimulus from the European Central Bank, although uncertainty remains over a possible rate increase in the United States.
"We find the fundamental market backdrop still supportive for global equities. Within this, the growth/policy trade-off favors eurozone over the US, in our view," strategists at JP Morgan Cazenove said in a note.
Outside Portugal, Continental fell the most after the auto parts maker missed earnings expectations, although it raised its full-year outlook. The shares dropped 5.2 percent.
The muted mood in autos spread to Renault, down 2.7 percent after French Prime Minister Manuel Valls said on Sunday the French government did not want a merger between the car maker and its Japanese partner, Nissan..
Atlantia fell 3.7 percent after the Italian operator of highways and airports said it had broken off talks with international investors to sell a minority stake in its Rome airport unit.
German airline Lufthansa fell 2 percent after the company announced hundred of flight cancellations due to a strike action.
Energy stocks were the best performing sector with a gain of 0.7 percent. Oil futures rose towards $48 a barrel after OPEC said it expected global demand to remain strong next year.
Ericsson rose 2.2 percent after the telecoms equipment maker and networking group Cisco Systems agreed a partnership expected to generate revenues of $1 billion for each company by 2018.
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