After gaining almost half a percent at the open, the pan-European STOXX 600 index inched lower as the session wore on and closed down 0.2%.
Germany's DAX also fell 0.2% even as the ZEW economic research institute's survey showed investor sentiment in Europe's largest economy rose by more than expected in January.
France's CAC 40 declined 0.3% and London's FTSE 100 slipped 0.1%.
European bourses started the day in optimistic mood over China's economic strength after data confirmed the world's second-largest economy was one of the few to grow over 2020.
However, the prospect of longer lockdowns kept investors on edge as German Chancellor Angela Merkel and state premiers agreed to extend a lockdown for most shops and schools until Feb. 14, sources told Reuters.
Defensive sectors that tend to be less affected by economic cycles such as healthcare and utilities gained, while retail, mining and travel and leisure took the biggest hits.
Among the companies that reported quarterly results, Switzerland's Logitech fell 6.4% after hitting an all-time high earlier in the wake of raising its 2021 sales growth and profit outlook.
Miner Rio Tinto slipped despite reporting a 2.4% rise in fourth-quarter iron ore shipments, helped by industrial activity in top consumer China.
As European earnings gather pace, analysts are predicting a 26.2% decline in fourth-quarter profit for companies listed on the STOXX 600, as per Refinitiv IBES data.
However, the main worry for investors is that an expected 43.5% and 81.1% rebound in first and second quarter earnings could be called into question as the European economy reels from the impact of stringent COVID-19 lockdowns.
"Going in to the Q4 earnings season investors are more likely to be concerned with the outlook than historic performance given that the situation with the virus is changing so quickly," said Edward Stanford, head of European equity strategy at HSBC.
"With the prospects for economic growth potentially coming under pressure, we see a little bit of downward pressure on consensus earnings for Europe for 2021."
Danone rose 2.7% after an activist investor called on the French food group's chief executive to step down after it took a stake in the company late last year.
Weighing on the FTSE 100, Ladbrokes owner Entain tumbled 11.9% after U.S. casino operator MGM Resorts ditched plans to buy the British company after it rejected an $11 billion takeover approach this month.
(Reporting by Amal S and Sruthi Shankar in Bengaluru; Editing by Arun Koyyur and Mark Potter)
By Sruthi Shankar