In a choppy session, the Stoxx Europe 600 index closed 0.7% lower at 257.28, breaking a four-day winning streak. The index fell 2.3% since the end of March.
"Spain seems to be the order of the day. The GDP data have stirred up fears about what could happen to Spain," said Marc Pussard, head of trading at Tradenext.
"It will continue for a while and I don't want to pick a bottom in this. There are negative ratings on the banks across all ratings agencies, and for once it seems like they got this one right."
Spanish banks were once again in the firing line, after Standard & Poor's Ratings Services took negative action on 16 of them in the wake of a double-notch downgrade of the nation's credit rating last week.
Shares of Bankinter SA gave up 2.7%, BBVA SA lost 2.2% and Banco Santander SA declined 2.5%.
"The broader European financial sector will be drawn in. There's a high level of cross-correlation in the banking sector, so other banks will also struggle," Pussard said.
"The worry is the exposure German banks have to Spanish and Italian banks. Germany is doing well but is not immune to these problems," he said.
Spain's IBEX 35 index tumbled 1.9% to 7,011.00. The index suffered a brutal April fall, declining 12.4% over the course of the month. The index is down more than 18% since the beginning of the year.
Data showed the Spanish economy slipped into recession in the first quarter as gross domestic product declined 0.3%. Economists had forecast a 0.4% quarterly decline, in line with an earlier estimate by the Bank of Spain.
"Although the figure is not quite as bad as forecast of a 0.4% fall, don't get carried away with optimism--I believe that Spain is close to imploding under austerity and a property bust. It is following Ireland but without the benefits of a reformed and pro-business economy," said Louise Cooper, markets analyst with BGC Partners, in a note.
European stocks extended losses in afternoon trade as Chicago manufacturing activity dropped to a 29-month low in April.
Separately, consumer spending in the U.S. rose 0.3% in March, slightly below analyst expectations.
Wall Street was modestly lower.
Bucking the general trend in Europe, drug makers helped dent Monday's losses. Actelion Ltd. surged 13.6% in Zurich after saying hypertension drug Macitentan met its primary endpoint in a clinical test.
Danish heavyweight Novo Nordisk AS added 1.9%. The firm said late Friday that it expects to elect a new chairman in 2013, as current Chairman Sten Scheibye has been elected to the board of the Novo Nordisk Foundation and expects to step down in March next year.
Pharma shares also moved higher in London, with AstraZeneca PLC rising 0.7% after J.P. Morgan Cazenove lifted the stock to neutral from underweight.
The FTSE 100 index, however, slipped 0.7% to 5,737.78, weighed down by Randgold Resources Ltd., shares of which fell 3.4%. Nomura downgraded the miner to reduce from neutral, citing political risks in Mali, where the company has operations.
The FTSE ended the month with a 0.5% decline.
Banks saw pressure. Barclays PLC lost 2.2% and Standard Chartered PLC slipped 1.1%.
In France, the mood was also negative as Total SA helped push down the CAC 40 index 1.6% to 3,212.80. The index saw a 6.2% monthly drop in April.
Total lost 1.2% to EUR36.07 a share after Citigroup cut its target price to EUR34 from EUR38 to reflect a "more cautious forecast."
STMicroelectronics NV sank 5% as Moody's Investors Service changed the outlook on the chip maker to negative from stable.
In Germany, Adidas AG jumped 5.3%. The sportswear and apparel maker reported a 38% rise in first-quarter profit, above analysts' expectations, and raised its forecast for the year.
"Fifty-eight percent of companies that have reported in the Stoxx 600 have beaten analysts' expectations, but cynically it might just suggest that estimates were really low and earnings are still [slumbering] compared to the U.S.," Tradenext's Pussard said.
Volkswagen AG rose 1.4% to EUR128.95 after J.P. Morgan Cazenove reiterated its overweight rating on the stock and lifted its price target to EUR206 from EUR202.
The DAX 30 index lost 0.6% to 6,761.19, pressured by Deutsche Bank AG off 1.9%. The Dax saw a 2.7% monthly fall.
Among other notable decliners in Europe, Anheuser-Busch InBev NV gave up 1.2%. The owner of beer brands Budweiser and Stella Artois, among others, reported a 75% increase in first-quarter profit, but revenue came in slightly below analysts' expectations.
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