The pan-European STOXX 600 index fell 0.7%, easing from its February 2020 peak hit on Friday.

Germany's DAX index shed 0.8% after hitting all-time highs last week and France's CAC 40 was also down 0.8%, while London's FTSE 100 dropped 1.1%.

Investors piled into undervalued sectors of the market including banks, energy and mining last week after a Democratic sweep in the U.S. Senate elections raised expectations of larger U.S. fiscal stimulus. Wall Street and Asian stocks hit all-time highs last week, while UK equities added more than 6%.

"What's driving the market is optimism that we will have more U.S. fiscal stimulus, but the question is are all the prerequisites for a real reflation in place," said Elwin de Groot, Rabobank's head of macro strategy.

"I would say the answer to that is no. We still need to cope with the new wave of virus infections, and it's taking quite a bit of time in many countries to rollout vaccines."

Most of Europe was under the strictest restrictions after the continent became the first to report 25 million coronavirus cases last week, while China saw its biggest daily increase in infections in more than five months.

UK markets lagged after a top medical adviser said the pandemic's worst weeks were imminent as a new, more transmissible variant of the disease surges through the population.

Mining stocks shed 1.7% as a stronger dollar and worries about demand weighed on metal prices. [MET/L]

Travel & leisure stocks fell the most as Carnival Corp reported a bigger-than-expected preliminary quarterly net loss as the cruise operator's business was brought to a virtual standstill by the COVID-19 pandemic.

Swiss drugmaker Roche gained 3.7% after the European Commission approved its Xofluza to treat influenza in patients aged 12 years and above.

Britain's biggest sportswear retailer JD Sports rose 3.8% after it forecast fiscal 2021 profit to be "significantly ahead" of current market expectations.

Danish jewellery maker Pandora inched up 0.4% after it said new lockdown measures had forced it to close a quarter of its stores at the beginning of the year, even as it raised full-year earnings guidance.

(Reporting by Amal S and Sruthi Shankar in Bengaluru; Editing by Shailesh Kuber, Saumyadeb Chakrabarty and David Gregorio)

By Sruthi Shankar