European shares fell on Wednesday, with ACS leading construction stocks lower after the sale of its stake in Iberdrola was seen hitting its earnings, as Spanish stocks slipped on concerns about the health of the country's banking sector.

Spanish building company ACS fell 5.8 percent after saying its sale of a 3.69 percent stake in utility Iberdrola would hit this year's earnings by 540 million euros ($709.6 million). That pushed construction and materials shares down 2.2 percent.

At 1116 GMT, the FTSEurofirst 300 index of top European shares was down 0.6 percent at 1,046.35 points after surging 2 percent on Tuesday, the biggest daily gain in more than four months, following some encouraging company earnings and firm demand at Spanish short-term debt sales.

Spanish stocks fell the most, sliding 3.2 percent. Sentiment worsened after European Central Bank policymaker Jens Weidmann said Spain should take a rise in its bond yields as a spur to tackle the root causes of its debt woes and not look to the ECB to help by buying its bonds.

Spain's equity market came under intense pressure after data showed Spanish banks' bad loans rose to their highest since Oct. 1994 in February, to 8.2 percent of their credit portfolios as the sector continues to battle sliding house prices and a looming recession.

The number is very high and could go even higher in the future as Spain's economy is going to shrink. Spanish banks will face more writedowns, and that means they would need more recapitalisations. That is putting pressure on the Spanish stock market, said Koen De Leus, strategist at KBC Securities.

European banks fell 1.7 percent, Bankinter fell 3.9 percent, Dexia was down 4.4 percent and KBC Groep fell 4.8 percent.

Some analysts remained cautious on the market despite recent gains saying there were a lot of uncertainties at the moment and bias was more on the downside for European stocks in the coming months.

We're still happy to stay defensive from here for the medium term, Michael Jarman, chief market strategist at H2O Markets in London, said.

Strategically I am not prepared to change my stance on the market. Although it's encouraging to see positive macro data from the EU coupled with a good bid to cover on the Spanish debt auctions, the real test will come tomorrow as we assess investor sentiment towards the longer-dated auctions.

MINERS SUPPORT

Losses in European stocks were capped by firmer miners. The STOXX Europe 600 Basic Resources index rose 0.6 percent, with BHP Billiton rising 1.5 percent after its quarterly iron ore output fell less than some analysts had expected and came in better than rival Rio Tinto.

Overall a decent set of figures with the company (BHP) delivering broadly in line with our modelling for the key divisions and reiterating guidance in iron ore, petroleum and copper which together make up 89 percent of financial year 2012 EBIT (earnings before interest and taxes), Barclays said in a note.

Analysts said the stock market could trade in a broad range in the coming sessions, with the focus shifting to the first quarter company earnings that could set the market's direction.

The head of investment dealing at a UK-based fund company that manages about $80 billion said that unless there was a big switch of funds from bonds into equities, it was difficult for the market to post strong gains.

You have got China slowing and you are in the middle of the earnings season. And you have got bond yields in some European countries creeping higher. Investors think that Europe is still not out of the woods yet.

Chemical shares fell 1.2 percent, led lower by the world's largest agrochemicals company, Syngenta, which fell 3 percent after posting in-line results.

Among individual movers, Fresnillo rose 2.9 percent after it posted first quarter gold production ahead of its target and said its silver output was on track.