The Spanish Treasury sold $3.8 billion of a 15 year government bond

The pan European Stoxx 600 index closed down 1.2% at 252.97. The U.K.'s FTSE 100 index fell 0.8% to 5211.29, and France's CAC-40 index ended down 1.4% at 3581.82. Germany's DAX fell 1% to 6149.36, breaking a seven-session winning streak.

As worries grew about the pace of the U.S. recovery, concerns over the euro zone sovereign debt crisis continued to ease.

A successful debt sale by Spain helped the euro rise above $1.28, a sharp bounce from the level of $1.1876, a more than four-year low, it hit in early June.

The Spanish Treasury sold $3.8 billion of a 15 year government bond, the maximum it had intended. A French auction, held after Spain's, was also well received.

Also on a brighter note, second quarter earnings from J.P. Morgan Chase came in better than expected. U.S. weekly claims for unemployment benefits fell 29,000 to their lowest level since August 2008, though claims lasting more than one week jumped. Still, banking stocks retreated as the U.S. Senate planned to vote on the sweeping financial overhaul bill.

A final vote would help to end months of uncertainty over how the new rules will affect the industry.

Investors are now braced for growth by financial companies to slow as new regulations kick in. Shares in Barclays fell 4.2% in London, while Royal Bank of Scotland slid 2.2%. In Paris, BNP Paribas dropped 4% and Credit Agricole lost 3.3%.

In major market action: Greece's fourth largest lender by assets, Piraeus Bank, said it will offer EUR701 million to acquire controlling stakes in two Greek government controlled banks, in what is seen as the first in a possible wave of mergers in the Greek banking sector.

Piraeus Bank ended up 13%, while Hellenic Postbank shares jumped 22% and ATEBank ended 6.5% higher. The proposal comes as the government has been increasingly keen to promote consolidation in the sector amid concerns about the medium term health of the Greek banking sector.

Analysts generally welcomed the move saying that it would boost Piraeus Bank and may touch off a wave of other mergers in the industry.

Commodity stocks fell as doubts mounted about the outlook for demand. Rio Tinto slipped 3.3%, and BHP Billiton fell 1.2%. Kazakhmys fell 1.9%.