European shares were pulled lower on Monday afternoon by weaker banks hit by concerns that no solution has yet emerged from talks between Greece and private bondholders.

French banks suffered more than most after President Nicolas Sarkozy said a French financial transaction tax would be set at 0.1 percent.

Negotiations between Greece and private bondholders over the restructuring of 200 billion euros ($263 billion) of Greek debt, which made progress over the weekend, were not expected to conclude before an EU summit begins at 1400 GMT.

Investors are hoping for a deal to avoid a messy default by Greece, which could cause havoc in the financial system and hit company profits.

It's one of those days when investors worry again about whether Greece can be solved and private investors will take the appropriate haircut, said Richard Batty, strategist at Standard Life Investments, which has 157 billion pounds ($246 billion). of assets under management.

We're pretty cautious on equities.

Banking stocks, many of which have exposure to euro zone peripheral debt, were the worst performers, with the STOXX Europe 600 euro zone Banks index down 3 percent.

French banks BNP Paribas, Societe Generale and Credit Agricole fell between 4.9 and 5.6 percent.

They are among the banks with large holdings of the region's peripheral debt and were worst hit on worries they could be forced to make further writedowns if no solution is reached.

BOND AUCTIONS

Other aspects of the euro zone debt crisis continued to weigh on sentiment.

Italian bond yields showed little major reaction to the results of its latest bond auction on Monday, continuing to trade poorly on the day after rising earlier in the session.

The 10-year yield was at 6.2 percent, up 28 basis points on the day, though lower than levels over 7 percent seen late last year, which were a key factor in pulling down equity markets at that time.

Markets are cautious on the newsflow. The bid to cover ratio was disappointing in Italy, and investors are increasingly worried about Portugal, said Standard Life's Batty.

Portuguese debt and stocks have fared far worse than other highly-indebted euro zone given worries it could follow Greece and need to restructure its borrowings.

European leaders will struggle to reconcile austerity with growth on Monday at a summit to approve a permanent rescue fund for the euro zone and put finishing touches to a German-driven pact for stricter budget discipline.

Batty was sceptical about prospects for the summit.

The problem with the summits is that they have serially disappointed over time with no comprehensive road map for Europe's sovereign debt crisis, he said.

By 1216 GMT, the pan-European FTSEurofirst 300 index of top shares was down 0.7 percent at 1,033.92 points.

The index fell 1.1 percent on Friday when U.S. GDP figures missed expectations, although they confirmed a continued recovery in the world's biggest economy.

Growth in areas such as the United States and China has encouraged investors, and helped to offset the gloom in the euro zone.

JPMorgan confirmed its bullish stance on risk assets, arguing upbeat purchasing manager data and monetary support from global central banks can support the recent rally.

The pan-European index is up more than 21 percent from the 2011 low it hit in September.

Bill McNamara, technical analyst at Charles Stanley, said the slight downturn had come at an interesting time.

The index is struggling with resistance in the form of its long-term downtrend. It is also working to hold on to its short-term uptrend, he said.

The latter is implying the possibility of support at around 1040, although 1028 (which was the last area of critical resistance) is going to be the level to watch.