European shares fell on Wednesday as investors feared that a resurgence in Covid-19 cases would quash hopes of a swift recovery in the global economy, while rising US-China tensions also dented sentiment.

The pan-European STOXX 600 index fell 1.4 per cent, with banks proving a drag after a slew of negative updates. Automakers, travel and leisure, and oil and gas also dragged the main index lower.

Shares in Germany's Commerzbank slid 4 per cent and Dutch bank ABN Amro dropped 5.8 per cent after swinging to a loss in the first quarter as the Covid-19 pandemic drove up loan loss provisions.

Deutsche Bank dropped 3.8 per cent on news that top managers will waive one month of fixed pay in an effort to cut costs.

The global mood tracked a grim overnight session on Wall Street after a top US infectious disease expert warned that premature moves to reopen the US economy could have dire consequences.

European shares have climbed nearly 25 per cent from March lows as investors hoped for a swift economic recovery as many countries emerge from lockdowns. However, stocks have lost some steam in May as countries, including South Korea, Germany and China, reported a rise in infections after easing restrictions.

“The consolidation in equity markets continues as the market looks for new themes and is uncertain about the shape of the recovery until we see tentative signs of normalisation,” Sebastien Galy, macro strategist at Nordea Asset Management, wrote in a client note.

Further souring the mood, a leading US Republican senator on Tuesday proposed a legislation that would authorise US President Donald Trump to impose sanctions on China if it fails to give a full account of events leading to the outbreak of the coronavirus.

Among stocks, sensor producer AMS slumped 9.4 per cent to the bottom of STOXX 600, along with other trade-sensitive chipmakers such as Dialog Semiconductor and STMicroelectronics.

Shares in Exor, the holding firm of Italy's Agnelli family, fell 5.1 per cent after French insurer Covea walked away from its planned $9 billion purchase of PartnerRe, the Bermuda-based reinsurer owned by Exor.

Earnings expectations are deteriorating sharply in Europe, with companies listed on the STOXX 600 now expected to report a 46.7 per cent drop in the second quarter, down from a fall of 44.9 per cent forecast the week before.

For the third quarter, analyst expectations are now set for a 35.1 per cent fall in earnings, compared with 32.7 per cent a week ago.

All eyes will be on a speech by US Federal Reserve Chairman Jerome Powell at 1400 GMT amid rising market speculation the US could adopt negative interest rates.