Spain's IBEX-35 was down 0.7% at 7096.90. Elsewhere, London's FTSE 100 was down 0.6% at 5745.72, Frankfurt's DAX was flat at 6798.72, and Paris's CAC-40 slid 0.8% to 3238.69. France will be in focus this week as the second round of the French presidential elections nears.
The Spanish economy contracted 0.3% in the first quarter from the fourth, and 0.4% on annual basis, but the numbers were slightly above the Bank of Spain's estimates released last week. The Bank of Spain had expected that first-quarter GDP contracted 0.4% from the fourth quarter and 0.5% on an annual basis.
"We fear that things are likely to get worse before they get better," said Martin van Vliet, economist at ING Bank. "The ongoing drag from real estate and the sheer scale of Spain's planned fiscal adjustment mean that the recession will almost certainly deepen in the coming quarters, pushing unemployment to even more dramatic highs."
Adding to the malaise, Standard & Poor's said Monday it has downgraded 11 Spanish banks meaning that some are now sub-investment grade, while five other banks have had their outlook shifted down.
This announcement follows the two-notch downgrade of Spain's sovereign rating on Friday from A to BBB+ by S&P.
The move by S&P raises further questions about the banking sector, after Moody's Investors Service announced a review of 17 major banks and securities firms in February. The outcome of the review is expected around in early May, or late June. "Moody's is expected to downgrade major capital market banks by potentially 1-3 notches," said Citigroup. It said "banks have clearly been preparing for the potential near-term impact of ratings downgrades, by reducing reliance on money market funds and significantly bolstering liquidity buffers."
In addition, nervousness ahead of Spain and France's bond auctions on Thursday will likely intensify. All this while Spain is bracing for a week of rallies and demonstrations against draconian cuts in public services.
The 10-year Spanish government bond yield ticked up a touch following the Spanish economic data, but at 1020 GMT was little changed at 5.892%, according to Tradeweb.
While concerns about Spain continue, equity markets have to some extent been supported by positive corporate earnings news out of Europe and the U.S. In addition, traders are anticipating that the U.S. Federal Reserve may have to consider another round of quantitative easing, after a weaker than expected reading of 2.2% for U.S. gross domestic product growth in the first quarter.
"The decision about whether or not more quantitative easing is necessary will be squeezed into the second quarter," commented David Miller, partner at Cheviot Asset Management.
As well as the news about Spain, market participants digested data showing that inflation in the euro zone eased less than expected in April. The flash estimate of the annual consumer price index rose 2.6% on the year, compared with a 2.7% increase in March, and expectations for a 2.5% rise.
Data out Monday showed bank lending to euro-zone business slowed to 0.6% in March compared with a year earlier, a sign that the European Central Bank's three-year loans have yet to reach the real economy. "The latest ECB lending survey clearly showed that demand for loans remained depressed in the first quarter of 2012, as both households and businesses have a very cautious approach, given the current uncertainties surrounding the economic environment," said Newedge.
In corporate earnings news, Adidas increased 5.2% after the sportswear and equipment maker raised its guidance for the year and said its net profit jumped 38% in the first quarter to EUR289 million, primarily due to stronger- than-anticipated growth in China and Japan.
Elsewhere, Anheuser-Busch InBev fell 2.2% despite announcing that net profit in the three months to March 31 soared 75% to $1.69 billion from $964 million a year earlier, beating analysts' expectations. The company has high exposure to the U.S., where consumers have been cutting spending and high unemployment has hit the key beer-drinking demographic.
In foreign exchange markets, the euro slipped against the dollar. At 1020 GMT, the common currency was at $1.3215 against the greenback from $1.3252 late Friday in New York. The dollar was at Y80.16 from Y80.26.
Spot gold was down 90 cents at $1,662.30 per troy ounce, from its New York settlement on Friday. June Nymex crude oil futures were 72 cents at $104.21 per barrel and June Brent oil futures were down 76 cents at $119.07. The June bund contract reversed earlier losses and was up 0.36 at 141.06.
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