The pan-European STOXX 600 <.STOXX> fell 0.5 percent, with euro zone blue-chips <.STOXX50E> down 0.5 to 0.7 percent.

Falls followed a fragile Asian session which saw investors shed risky assets as joint U.S. and South Korean military drills began.

The risk-off move in Europe hit banks <.SX7P> the hardest, down 0.9 percent with Deutsche Bank (>> Deutsche Bank) and French lenders Societe Generale (>> Société Générale), BNP Paribas (>> BNP Paribas) and Credit Agricole (>> Crédit Agricole) among top losers.

After recent losses, the STOXX 600 was down around 6 percent from its mid-May 20-month peak.

Deal-making, however, helped cap losses.

Fiat Chrysler (>> Fiat Chrysler Automobiles) shares rose 6.9 percent to a 19-year high after Great Wall (>> Great Wall Motor Co Ltd) said it was interested in the Italian-American autmoaker, confirming reports it is pursuing all or part of the owner of the Jeep and Ram truck brands.

Even though Fiat said it had not been approached, its shares have gained 16 percent in the past week since rumours first emerged that a Chinese buyer may be interested in the firm.

Maersk (>> AP Moller-Maersk) gained 2.9 percent after the firm agreed to sell Maersk Oil to French oil major Total (>> Total) for $7.45 billion. [nL8N1L70XF]

"We see the deal as free cash flow neutral over 2018/19, and accretive thereafter as capital expenditure falls closer to $500 million per annum," analysts at RBC Capital Markets said.

Total shares inched up 0.3 percent.

With the second-quarter European reporting season drawing to a close, 60 percent of companies have either beaten or met expectations, though share price reactions have been muted overall.

"In isolation the results appear quite good," said Barclays analysts looking back at the earnings season.

"However investors appear disappointed that the results were not as good as the record-breaking first quarter season," they added, saying concerned investors taking profits could be behind the lukewarm reaction in share prices.

Swiss chocolatier Lindt & Sprungli (>> Lindt & Spruengli) gained 3.4 percent after UBS upgraded it to a buy, saying its premium product offering helps it benefit more from lower cocoa input costs than peers.

"Despite a trend towards healthy snacking, Lindt's sales growth should be stronger than the market assumes, given its products are perceived as an indulgence," UBS analysts added.

(Reporting by Helen Reid and Danilo Masoni; Editing by Kit Rees)

By Helen Reid