The pan-European STOXX 600 index dropped 1.0% to 479.79 points. Tech stocks declined 2.2%, the most among their peers, as they resumed a losing spree that began at the start of the year.
Two-year Treasury yields , which track short-term rate expectations in the United States, crossed 1% for the first time since February 2020. Higher lending rates tend to discount future earnings in technology firms.
The European tech sector has closed lower for 10 of the 12 trading sessions so far this year.
"With the FOMC (Federal Open Market Committee) and BoE (Bank of England) already in tightening mode, it is difficult not to see the ECB (European Central Bank) similarly changing tack and moving policy towards fighting inflation also, particularly given the impact of soaring energy prices and the expectation that these are expected to continue their steady rise higher," said Stuart Cole, head macro economist at Equiti Capital.
"We had a good start to the year, but that early euphoria has waned, and equities might have a difficult couple of weeks in the run-up to the Federal Reserve meeting."
The STOXX 600 hit record highs at the start of this month, but sharply reversed course as hawkish central banks, geopolitical tensions and soaring energy prices kept investors on edge.
Investors are now awaiting next week's Fed policy meeting following hawkish signals from central bank officials.
The fourth-quarter earnings season is also expected to help gauge the impact of the omicron coronavirus variant and supply chain issues on European earnings.
Oil stocks were among the few gainers for the day, rising 1.1% as crude prices surged to seven-year highs after political unrest in the Middle East stoked fears of limited supply. [O/R]
Among individual stocks, Swiss asset management firm GAM Holding slumped 16.7% after saying it expected to post a roughly 30 million franc net loss for 2021 when it reports earnings next month.
French food caterer Sodexo rose 1.7% after Reuters reported Bain Capital was looking to bid for a stake in its benefits and rewards services unit.
Chocolate maker Lindt & Spruengli fell 3.0% after it said sales of its upmarket chocolates will likely grow at a slower pace in 2022 than last year, due to supply chain bottlenecks.
(Reporting by Anisha Sircar in Bengaluru; Editing by Subhranshu Sahu, Amy Caren Daniel and Paul Simao)
By Anisha Sircar and Ambar Warrick