LONDON/MILAN (REUTERS) - European shares fell sharply on Monday, the first trading day of 2016, as weak Chinese data weighed on world stock markets.
The pan-European FTSEurofirst 300 index lost 2.5 per cent, its biggest one-day drop since a 3.3 per cent fall on Dec 3, while the euro zone's Euro STOXX 50 index fell 3.1 per cent and Germany's DAX slumped 4.3 per cent.
China's factory activity contracted for the 10th straight month in December and the decline accelerated compared with November, a private survey showed.
China's benchmark CSI300 share index tumbling 7 per cent on Monday, prompting the stock exchange to halt trading for the rest of the day.
"This year got off on the wrong foot because of China," said ActivTrades chief market analyst Carlo Alberto De Casa.
All sectors were in negative territory with auto stocks , for whom China is a key overseas market, leading the way with a fall of 4.5 per cent.
But shares in Ferrari edged up 0.5 per cent in their Milan debut as the luxury sports car maker completed its spin-off from parent Fiat Chrysler. De Casa said the listing of such an important brand could be a good sign for Italy after many delistings.
Oil stocks extended losses to fall 1.5 per cent as crude prices turned lower late in the session following an unexpected rise in US crude stocks. The sector however outperformed as oil prices remain above recent lows as tensions in the Middle East escalated following Saudi Arabia's execution of a prominent Shi'ite cleric.
Market volatility increased, with the Euro STOXX 50 Volatility Index gaining ground.
JP Morgan's equity strategist Mislav Matejka said he would stay "overweight" on euro zone equities, given signs of an economic recovery in the region. But he was more cautious on equities overall, citing tensions in the credit market and a weakening in the U.S. stock market.
"We would look to use any strength as an opportunity to reduce equity allocation," Matejka said. He advocated selling out on any move up.
Telecoms were also in focus, with French conglomerate Bouygues rising 1.7 per cent after a media report that Orange was closer to buying Bouygues' telecoms arm for 10 billion euros.
Air France KLM shares rose 3.3 per cent after Bank of America Merrill Lynch upgraded its rating on the stock to"buy".