After holding largely unchanged in morning trade, the pan-European STOXX 600 fell into the red and closed down 1.2% - its biggest single-day percentage fall in over five weeks.
The global mood also soured as investors turned more cautious about mounting coronavirus cases around the world and about stretched stock valuations after retail investors piled into some niche U.S. stocks, causing an eye-popping surge in their market value within just days.
The German DAX underperformed major regional indexes, falling 1.8%, after the growth forecast for Europe's largest economy was cut to 3% for this year, a sharp revision from last autumn's estimate of 4.4%.
Economy-linked stocks bore the brunt of Wednesday's selloff, with miners, banks and automakers falling between 2% and 3.6%.
"It can be a bit bumpy, especially the first half of the year," said Matthias Scheiber, global head of multi-asset solutions at Wells Fargo Asset Management in London.
"The lockdown will have a negative impact, but we are generally positive on the value-oriented sectors because from a valuation perspective, they are still cheap."
Euro zone banks came under pressure as a member of the ECB's governing council, Klaas Knot, said the central bank could decide to cut its deposit rate further below zero if that proved necessary to keep its inflation target in sight.
Few if any changes were expected to the U.S. Federal Reserve's policy statement, due at 1900 GMT, but Fed Chair Jerome Powell was likely to renew a commitment to ultra-easy monetary policy.
Precious metal miner Fresnillo Plc slumped 13.0% after it forecast lower gold output for the current year.
French luxury group LVMH slipped 0.3% even as booming sales at fashion brands like Louis Vuitton, particularly in China, helped to cushion the impact of the pandemic.
Danish medical device maker Ambu surged 23.6% after upbeat quarterly results, while German health technology company Siemens Healthineers gained 3.1% after it raised its 2021 outlook for sales and earnings.
Echoing the retail trading fever that has gripped Wall Street, drugmaker Evotec jumped 9.6% with other heavily shorted stocks like British publisher Pearson and cinema chain Cineworld soaring without any clear reason.
"Certainly if you look at some of the biggest movers in Europe, they are stocks that hedge funds have been shorting," Mirabaud Securities' Neil Campling said.
"It is difficult to know how exactly this will play out, but obviously with the volatility that we're seeing in individual stocks, it is very dangerous."
(Reporting by Sruthi Shankar in Bengaluru; Editing by Arun Koyyur and Mark Heinrich)
By Sruthi Shankar