UPDATE 1-European shares fall as risk-off sentiment spreads

European shares started the week in negative territory on Monday as fears a trade war could have a bigger impact than expected on China added to concerns that rising U.S. interest rates are gradually making stock markets less attractive for investors.

Shares in Asia slumped overnight despite Beijing's central bank increasing liquidity to offset the effects of the tariff row with the United States.

An unexpected dip in German industrial output also soured the mood as it was a "clear disappointment", ING analysts said.

At 0813 GMT, the pan-European STOXX 600 benchmark index was down 0.6 per cent. Germany's DAX also declined 0.6 per cent and the UK's FTSE fell 0.3 per cent.

"The markets remain incredibly fragile", wrote Stephen Innes from Oanda ahead of the open. He noted "the toxic combination of higher US yields and risk aversion, which has equity investors running for cover".

In Italy, the FTSE MIB was down 1.4 per cent to its lowest since 21 April 2017. A row between the populist government and the European Commission about Italy's deficit is weighing on bonds and putting pressure on bank shares.

"We are a bit surprised by the strength of the reaction in bond markets, but it appears the market is jumping to the conclusion that the European Commission will take a hardline stance when Italy submits its budget," said Mizuho rates strategist Antoine Bouvet.

Among top performers meanwhile was Norsk Hydro, up 4.7 per cent after the aluminium firm received a permit helping it towards restarting its Alunorte alumina refinery at half capacity.

Hearing aid maker William Demant, however, was bottom of the index, down 6.9 per cent, with traders pointing to a possible competitive threat from Bose after the FDA approved its over-the-counter hearing aid.

Europe's biggest standalone investment firm, Britain's Schroders rose 1.2 per cent after it said it was in talks with Lloyds in what could lead to one of the biggest recent deals in the wealth management industry.

(With inputs from agencies.)