The pan-European STOXX 600 index fell 2.1% in its worst day in more than three weeks, with autos, insurance and energy stocks tumbling more than 2%.
Bank shares <.SX7P> tracked a decline in bond yields, shrugging off signs of a pickup in M&A activity after a report said Italy's Banco BPM and France's Credit Agricole had signed a confidentiality agreement in a first step towards formal talks over a possible merger.
"Investors are unnerved by what's going on with COVID-19 and how that is negatively impacting jobs and the ability for many businesses to succeed," said Russ Mould, investment director at AJ Bell.
"It's becoming more apparent that the pandemic could still be raging well into 2021 and so economic prospects have become even more clouded."
European stock markets bounced from the coronavirus lows hit in March on a raft of global stimulus, but sentiment has recently taken a hit from the surge in infections as well as signs of a slowing economic rebound.
France has imposed curfews and other European nations are closing schools and cancelling surgeries in an attempt to contain the resurgence ahead of the winter season.
Bourses in France, Italy, Spain and Germany fell between 1.4% and 2.8%.
The UK's FTSE 100 was down 1.7% as the government imposed tighter restrictions in London, while investors looked for signs of progress towards a Brexit trade deal at the two-day European Union summit that began on Thursday.
EU leaders said agreeing a "fair" new partnership with Britain was "worth every effort" but that the bloc would not compromise at any cost and was ready for an abrupt split in trade worth a trillion euros every year.
"It's not in anyone's interest if the UK leaves the EU without a deal and markets are so far leaning towards an 11th-hour Brexit agreement," said Hussein Sayed, a market strategist at FXTM.
In company news, Swiss drugmaker Roche shed 3.5% even as it posted record revenue in its diagnostics division that offset declining drug sales and kept it on track to meet its full-year 2020 targets.
Ryanair fell 4.3% as it said it would cut its planned winter capacity by a third due to the wave of travel restrictions imposed by European governments.
(Reporting by Sagarika Jaisinghani in Bengaluru; Editing by Subhranshu Sahu and Arun Koyyur and Kirsten Donovan)
By Sagarika Jaisinghani