Bond yields globally hit multi-month highs following a report that Chinese officials have recommended slowing or halting purchases of U.S. government bonds.

The yield on 10-year U.S. Treasury hit a 10-month high, while Germany's 10-year bond yield also hit its highest since the European Central Bank extended and cut its bond buying scheme in October.

The pan-European STOXX 600 <.STOXX> index fell 0.4 percent, pulling back from a 2 1/2 year high hit on Tuesday, while euro zone blue chips <.STOXX50E> declined by the same amount.

Banks <.SX7P> however surged 2.1 percent to their highest in more than 2 years, as higher interest rates typically generate more revenues and profits for lenders.

"Higher rates could be coming in our view, and given the moves can be vicious when they finally arrive it seems sensible to position for such ahead of the event," Northern Trust Capital Markets analysts wrote in a note.

"Clearly banks should win in a rising rate environment; so too should commodities," they added.

UK's RBS (>> Royal Bank of Scotland Group plc) rose 4.6 percent, Germany's Commerzbank (>> Commerzbank AG) and Italy's Intesa Sanpaolo (>> Intesa Sanpaolo SpA) were among the biggest gainers in the sector, all up more than 4 percent.

Traders said Italian banks <.FTIT8300> led by Monte dei Paschi di Siena (>> Banca Monte dei Paschi di Siena SpA) were also supported by Bank of Italy data showing a further decline in soured loans.

European pharmaceuticals, utilities and consumer staples fell as the rise in bond yields dimmed the appeal of their stable dividends.

Elsewhere, Tele2 (>> Tele2 AB) tumbled 7.5 percent, leading losers in Europe after the Swedish telecoms firm agreed to a $3.2 billion takeover of cable TV company Com Hem (>> Com Hem Holding AB).

Com Hem rose 3.4 percent.

Altice (>> Altice), down 7.2 percent, was another heavy faller with traders citing a downgrade to sell from Louis Capital Markets.

Metro Bank (>> Metro Bank PLC) rose 4.3 percent after an upgrade from Citi.

IG Group (>> India Capital Growth Fund Ltd) declined 4.4 percent following conclusions of a review of the contracts-for-difference market by the UK's FCA.

Still in the UK, Sainsbury (>> J Sainsbury plc) rose 2.2 percent after the supermarket group reported a slight beat to forecasts for Christmas sales and said it was nudging up full-year profit guidance.

(Reporting by Danilo Masoni and Julien Ponthus; Editing by Toby Chopra)

By Danilo Masoni and Julien Ponthus