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The yield on the benchmark 10-year German government bond plunged to well below 2%, a new record, while Italian yields rose on fears the government's commitment to austerity and reform is weakening.

Europe' beleaguered banking sector was battered over concerns about growth as well as lawsuits filed against 17 lenders Friday by the top U.S. federal housing regulator, saying they sold $196 billion of risky home loans over four years to Fannie Mae and Freddie Mac without adequately disclosing the risks.

Further evidence of the weakness of the European economy came in weak purchasing managers index data from France, Germany and the euro zone as whole.

"The banking sector continues to [be] under pressure," said Manoj Ladwa, senior trader at ETX Capital, in emailed comments. "The chances of a near-term recovery remain slim as euro-zone debt concerns, structural reform and a lawsuit for allegedly mis-selling mortgage debt all weigh heavy on the sector."

Shares of Royal Bank of Scotland Group, one of the banks named in the U.S. lawsuit, plunged 12%, while Deutsche Bank, another one of the banks, tumbled 8.9%. Among others, Société Générale skidded 8.6%, Barclays slumped 6.7%, and HSBC Holdings declined 3.8%.

Political and economic issues also weighed in Italy, where the government has been coming under increasing pressure to step up approval of its austerity package, which some say is being watered down. Investors have become increasingly concerned about the finances of the country, one of the biggest economies in the 17-member euro zone. Italy's FTSE MIB index sank 4.8% to 14333.91, with shares of Intesa Sanpaolo dropping 7%.

That focus on Italy comes after negotiations between Greece and international lenders stalled on Friday amid disagreement over the nation's progress on reducing its budget deficit. Greece's top central banker called on the government to speed up efforts to close the budget gap amid growing concerns elsewhere in Europe that Athens can't pull itself out of its debt spiral. The Athens General Index on Monday fell 3.1% to 863.90, aided by a 9.9% slide in EFG Eurobank Ergasias.