Rate-sensitive euro banks fell 1.1% after gaining as much as 1.8% earlier in the session.

In its first rate hike in 11 years, the ECB lifted interest rates to zero percent, breaking its own guidance for a 25 basis point increase, as inflation stood at a record high of 8.6%, way above its 2% target.

"We have less visibility as to what the ECB's next move might be and the market will be dependent on inflation data coming through, any indication the euro zone economy is accelerating or slowing down, it's more likely to slow down," said Julien Lafargue, chief market strategist at Barclays Private Bank.

"That means we're going to go now from meeting-to-meeting without necessarily having a good indication what the ECB will be doing next. And that is probably going to bring more volatility."

A gauge of euro zone shares dropped 0.4%. The broader-pan European STOXX 600 index fell 0.4%. Both the indexes had turned higher following the ECB's decision.

In a bid to cushion the impact of the rise in borrowing costs, the ECB also unveiled a new tool, the Transmission Protection Instrument and limit financial fragmentation.

This resulted in Italian banks cutting a chunk of their session losses to trade down 4.6%. They had fallen up to 7.2% earlier in the day after Prime Minister Mario Draghi resigned, pushing the country into political turmoil.

An early election in September or October will be the most likely outcome. Italy's benchmark FTSE MIB index which had dropped almost 3% earlier in the day, was last down 1.9%.

Some relief on Thursday came from easing worries over an energy supply crunch, as Russian gas resumed flowing through Nord Stream 1, the biggest pipeline between Russia and Germany.

(Reporting by Susan Mathew and Devik Jain in Bengaluru; Editing by Subhranshu Sahu and Arun Koyyur)

By Susan Mathew and Devik Jain