The STOXX 600 <.STOXX> fell 0.7 percent with the auto sector index <.SXAP> leading sectoral fallers, dragged down by 16.1 percent slump in Fiat Chrysler shares, the biggest faller on the pan-European benchmark index.

In spite of the auto woes and continued losses among pharma stocks on worries over pricing pressure in the U.S., Britain's blue chip FTSE 100 index inched up 0.03 percent, thinly extending to 13 days its record winning streak.

The U.S. Environmental Protection Agency accused Fiat Chrysler of using software that allowed excess emissions in 104,000 U.S. vehicles sold since 2014. The group led by Sergio Marchionne said it was it is "disappointed" with the EPA assertions.

"It's no surprise that another big auto maker is implicated for this was always going to be much bigger than just Volkswagen ...Fines and costs could be crippling if Volkswagen's experience is anything to go by," Neil Wilson, market analyst at ETX Capital said in a note.

A Milan-based trader says the market may conceive liabilities of around $3 billion, or 20 percent of Fiat's market value, assuming this case is similar to the one that hammered the German carmaker more than one year ago.

Fiat's 16 percent drop was its biggest ever and came as the stock was close to hitting a fresh record high. The auto index <.SXAP> fell 2.8 percent while elsewhere in the sector Germany's BMW (>> Bayerische Motoren Werke AG) and Daimler (>> Daimler AG) and France's Renault (>> Renault) all fell more than 2.6 percent.

"One thing is now clear – this scandal goes well beyond VW and Fiat Chrysler’s involvement raises the possibility that other big carmakers are involved," Wilson added.

Europe's healthcare sector index <.SXDP> fell 1.9 percent after U.S. President-elect Donald Trump targeted pharmaceuticals' drug pricing in a press conference.

Trump on Wednesday commented on the issue of competitive drug pricing, saying pharmaceutical companies were "getting away with murder" by charging high drug prices.

Italy's UBI Banca (>> Unione di Banche Italiane SpA) was top gainer of the STOXX, up 9.1 percent on news the bank would buy three rescued Italian banks through a 400 million euro share issue.

Swiss luxury goods group Richemont (>> Compagnie Financiere Richemont SA) was also a top European gainer, its shares jumping 8.6 percent after its trading update indicated a pick-up in demand for watches and jewellery. Peer Swatch (>> The Swatch Group SA) gained 5.4 percent.

Britain's blue-chip FTSE 100 was underpinned by gains among basic resources and precious metals miners, which were boosted by a weaker dollar, with Randgold Resources (>> Randgold Resources Limited), Fresnillo (>> Fresnillo Plc), and Anglo American (>> Anglo American plc) all up more than 2 percent.

(Additional reporting by Helen Reid; Editing by Angus MacSwan)

By Danilo Masoni