The pan-European STOXX 600 index fell 1%, giving back almost all of the gains made on Tuesday.
Dutch and British wholesale gas prices hit record highs on Tuesday amid wider energy market price hikes.
"The euro-area is one of the biggest losers (from the spike in natural gas prices) in the developed world with a current account deterioration potentially approaching 2% of GDP," Deutsche Bank said in a note.
"Recent moves could potentially wipe out Europe's trade surplus if they persist."
A global energy crunch, labour shortage and other supply chain constraints have weighed on a global economy recovery when major central banks are considering easing the massive pandemic-era stimulus. The STOXX 600 is down about 5.5% since hitting a record high in August.
"The question is whether central banks are going to act on this from an inflation perspective, which is set to go higher, or from a growth perspective, which is set to go lower," said Bert Colijn, senior economist at ING.
Germany's DAX dropped 1.5% after data showed German industrial orders fell more than expected in August on weaker demand from abroad following two months of unusually strong gains.
An index of European banks slipped 0.2%, but was among the smallest decliners on prospects of higher interest rates as U.S. and European government bond yields climbed and oil prices hit multi-year highs. [GVD/EUR] [O/R]
With the third-quarter earnings season looming, analysts are anticipating a near 46% rise in profit for companies on STOXX 600, boosted by energy and industrial companies, according to Refinitiv IBES data. That follows a 152.6% jump in the second quarter and a 25% decline in the year-ago quarter.
Tesco jumped almost 6% as Britain's biggest retailer raised its full-year outlook and launched a 500-million-pound share buyback programme.
Britain's HSBC rose 3.4% after UBS upgraded the stock to "buy", while Germany's Commerzbank gained 1.9% after the wider sector rallied 3.5% in the previous session.
Laggards included German software firm TeamViewer which sank 25% after it reported quarterly results below its own expectations and cut full year guidance.
Deutsche Telekom fell 5.4% after Goldman Sachs sold shares worth 1.58 billion euros ($1.83 billion) in a SoftBank structured finance deal.
(Reporting by Sruthi Shankar and Anisha Sircar in Bengaluru; Editing by Sriraj Kalluvila and Barbara Lewis)
By Sruthi Shankar and Susan Mathew