Madrid blue chips fell 0.5 percent by 0809 GMT, while the broader pan-European STOXX 600 index was flat and commodity-heavy FTSE added 0.4 percent.

Spain's Socialists on Sunday chose former leader and hardliner Pedro Sanchez to head the party again, a vote likely to make it harder for the ruling conservatives to secure the opposition support it needs in parliament to push through legislation.

"Although Sanchez was gaining traction over the past week the result comes as a surprise and could introduce political risk again into the Spanish investment case," Exane analysts said in an note to clients. "We can expect a short term negative market reaction," they added.

Financials, which tend to be particularly sensitive to politics, were the biggest fallers in Madrid. Banks Banco Popular, Bankia and Santander were down 1.6-3.5 percent.

The euro zone bank index was down 0.6 percent.

Strategists at Credit Suisse had downgraded Spanish stocks ear them as strong economic data and corporate earnings momentum moderated.

Elsewhere, basic resources stocks provided support with Europe's sectoral index up 0.4 percent.

Clariant soared 9 percent after the Swiss company and U.S. peer Huntsman agreed a merger to create a chemical manufacturer with a market value of over $14 billion.

Baader Helvea analyst Markus Mayer said he viewed the deal as a defensive move and that the stock should be boosted not only by potential synergies with Huntsman but also the chance of a possible rival bid.

"Clariant is the No. 1 takeover target in the sector with a long list of interested parties... (the) merger announcement might be the trigger for interested parties now to come up with a (hostile) takeover bid," he wrote in a note.

Aegon soared 7.4 percent after the Dutch-based insurer said it would sell some U.S. operations to boost its financial strength.

Analyst welcomed the terms of the deal, which they said also removed the risk of a possible capital increase.

UCB declined heavily, down 14 percent and set for its worst day in three decades, after the drugmaker and Amgen said their experimental osteoporosis drug was unlikely to win U.S. approval this year due to safety concerns.

Julius Baer rose slightly after its assets under management rose 6 percent in the first four months, echoing strong starts to the year by larger rivals. A trader said the Swiss private bank's update was slightly better than expected.

Four out of five European companies have released their updates so far, pointing to a first quarter earnings growth of 18.3 percent, according to I/B/E/S data. Even though growth has slowed from the more than 20 percent previously expected, the picture remains strong with 65 percent of the companies beating expectations and 8 percent meeting them.

(Reporting by Danilo Masoni; Editing by Raissa Kasolowsky)

By Danilo Masoni