Financial and commodities markets in the United States were closed for the July 4 public holiday. U.S. stock futures were up 0.1 percent in low volumes.

Europe's Stoxx 600 <.STOXX> fell 0.7 percent and London'sFTSE 100 <.FTSE> fell 0.9 percent dragged lower by weaker financials and homebuilders' shares.

Earlier in the day, the Australian dollar recovered from wobbly start caused by political uncertainty post-election while Asian shares and base metal prices rose, partly on expectations economic stimulus from China.

JPMorgan strategists warned investors against chasing the rally in risky assets.

"We do not believe that we will see a sustained upmove. Positioning is not washed out, market internals are not positive and political uncertainty will linger," they wrote in a note.

Caution is likely to persist through the week with the Bank England scheduled to publish its quarterly financial stability report on Tuesday, the June U.S. Federal Reserve meeting minutes due on Wednesday and U.S. jobs data on Friday.

In bond markets, worries about the health of Italian banks and some 20 billion euros (16.73 billion pounds) of bond supply in the region this week combined to halt a post-Brexit tumble in regional borrowing costs.

Italian banking index <.FTIT8300> fell more than 3.5 percent on Monday, while the European Central Bank asked Italy's Banca Monte dei Paschi di Siena to slash its bad debts by 40percent over three years, heaping more pressure on Rome and Brussels to stabilize the Italian banking system.

Italy is in talks with the European Commission on devising a plan to recapitalizes Italian lenders with public money limiting losses for bank investors, an EU spokeswoman said on Sunday.

UK POLITICS

Fears of an economic slowdown in the Britain have taken a toll on shares of smaller domestically focused companies, which have significantly underperformed export-oriented blue chips. This continued on Monday with the FTSE mid caps index <.FTC> off more than 2 percent.

Sterling came under pressure following poor data that showed Britain's construction sector PM survey suffered its worst contraction in seven years in the run up to the vote to leave the European Union.

The currency recovered some ground in late trading, rising 0.1 percent to $1.3284 , still nursing its losses after an 11-percent plunge to a 31-year trough of $1.3122 a week ago following last month's shock Brevity vote.The weekend's headlines were dominated by mixed messages from the candidates seeking to replace David Cameron as Conservative Party leader and prime minister, offering markets little certainty about the outlook for the months ahead.

The euro was little changed at $1.1140 and was down slightly against its Japanese counterpart at 114.27 yen . Crude oil prices extended gains from Friday's surge after comments by the Saudi energy minister that the oil market is heading towards balance despite signs of slowing demand in Asia.

Spot gold added 0.7 percent to $1,352.10 an ounce after gaining 1.5 percent on Friday and about 9 percent in June. Silver spiked 3 percent higher to $20.30 an ounce, breaking the $20-dollar level for the first time in nearly two years.

(Reporting by Vikram Subhedar; Editing by Toby Chopra)

By Vikram Subhedar