Europe close: Banks lead drop as volatility flies on Trump allegations

The pan-European benchmark Stoxx 600 index saw its worst one-day fall since September as investors rushed to protect from downside risks, sending a key gauge of stockmarket volatility flying.

At the closing bell, the Stoxx 600 was down by 1.20% to 391.24, alongside a drop of 2.12% for a sub-index of lenders´ shares, with Germany's high-flying Dax knocked 1.35% lower to 12,631.61.

Milan's FTSE Mibtel endured heavier losses, retreating 2.31% to 21,283.72 while the Cac 40 gave back 1.63% to finish at 5,317.89.

In parallel, the widely-tracked Vstoxx volatility index for the Euro Stoxx 50 jumped 19.32% to 16.16.

Overnight, the New York Times reported that US president Donald Trump tried to influence decisions by Federal Bureau of Investigation chief James Comey regarding his investigation into former national security adviser Michael Flynn.

Citing a memo from Comey himself, the NYT said Trump had told Coney: "I hope you can let this go".

The news sent new tremors across currency markets, with the single currency gaining a further 0.52% to trade at 1.1140 versus the Greenback.

Trump's political woes added to market pessimism about the prospects for aggressive fiscal stimulus in the US, highlighting the "deep divides" with the US Republican party, said Jane Foley and Piotr Matys at Rabobank.

According to the two FX strategists, that had contributed to the recent drop in the US dollar, but positive political news out of France and Germany had also played a role.

Nonetheless, they were squeamish about raising their year-end 1.10 forecast for the euro/dollar or their 1.12 12-month projection for the pair.

"The approaching Italian election suggests that the EUR reprieve from political apprehensions could be short-lived. Meanwhile there is a strong likelihood that the debate regarding a reduction in the Fed’s balance sheet will receive an airing in the coming months. Any reduction in the balance sheet should be a bullish USD factor," they said.

Total construction output in the Eurozone fell by 1.1% month-on-month, according to Eurostat, following a rise of 5.5% in the month before.

Euro area CPI for April was confirmed at up by 0.4% month-on-month and 1.9% year-on-year.

Volkswagen was on the backfoot after announcing that its joint-venture in China FAW-Volkswagen Automobile Co Ltd will recall nearly 600,000 Golf and Sagitar cars.

Air France-KLM dismissed the possibility that it might step in to save the near-bankrupt carrier.