European shares hit a two-week closing low on Monday as talks on a Greek debt swap deal stumbled on with no firm conclusion and U.S. consumer spending data lagged forecasts, dragging cyclical stocks lower across the board.

Also weighing on sentiment was a widening in the spread between Portuguese and German 10-year yields to euro-era highs, fuelling concerns Portugal may eventually follow Greece in restructuring its debt.

The promise of concluding Greek talks has not been delivered and people don't expect too much good news coming out of the European Union summit because already a lot has been promised and announced, said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

On top of that, people are worried that Portugal may follow Greece. This could prove to be a healthy correction in equity prices, but investors should remain defensive and cautious and invest in companies having good balance sheets, strong cash flows and nice dividends.

The FTSEurofirst 300 index <.FTEU3> of top European shares provisionally finished 1 percent lower at 1,030.34 points, the lowest close since January 16, after hitting a six-month high last week.

Banks bore the brunt of the market sell-off. The STOXX Europe 600 banking index <.SX7P> fell 3.1 percent, with French banks among the top decliners after President Nicolas Sarkozy's restated plan for a financial transaction tax, with an August target date, heated up the debate on more stringent legislation in the country.

(Reporting by Atul Prakash)