Top shares fell on Monday as the latest Italian bond auction dented investor confidence in the ability of new governments in Italy and Greece to tackle Europe's debt crisis.

An Italian 5-year government bond auction delivered an early market view on former European Commissioner Mario Monti's leadership after he was installed as Prime Minister of Italy on Sunday in the wake of Silvio Berlusconi's resignation.

While the auction was well covered, the record yield of 6.29 percent cast doubt on the long-term financing of the country.

German Chancellor Angela Merkel said that Europe could be living through its toughest hour since World War Two as new leaders in Italy and Greece rushed to form governments and limit the damage from the euro zone debt crisis.

Short-term, I suppose (the change in political leadership) is good in terms of sentiment, but not enough to calm market nerves, said Henk Potts, market strategist at Barclays Wealth.

There are still fundamental questions that need to be resolved, including how to stimulate growth within the euro zone, and I suppose what the roadmap is towards fiscal union, which you have to believe is the final destination.

Supporting expectations of a sharp contraction of output and a probable economic recession, industrial production in the euro zone posted its biggest monthly fall since February 2009.

The UK benchmark <.FTSE> closed 26.34 points, or 0.5 percent, lower at 5,519.04, led down by banks <.FTNMX8350> and miners <.FTNMX1770> as investors dumped riskier assets.

Trading volumes sagged, with the FTSE 100 at only 71 percent of its 90-day daily average.

There's not an awful lot that's really providing stimulus for people to actually start trading again. They want to see austerity packages put into practice rather than talked about, said Martin Dobson, head of trading at Westhouse Securities.

Barclays shed 2.7 percent as Goldman Sachs cut its rating on the stock to sell from neutral on expectations would be dealt the biggest blow by reforms from the Independent Commission on Banking.

Goldman said that while the ICB estimated the annual pretax costs of reform for UK banks at 4-7 billion pounds, it reckoned all-in costs at 10 billion.

ITV topped the leader board, up 3.3 percent after Britain's biggest free-to-air commercial broadcaster said it expects to outperform the wider television advertising market in 2011 after a better than expected Q3 trading update.

Luxury goods group Burberry , ahead of first-half results on Tuesday, took second place on the risers' list, up 3.2 percent.

And a broker upgrade helped lift medical products company Smith & Nephew by 2.6 percent. Exane BNP Paribas switched its rating on the stock to outperform from neutral. The stock has underperformed by 20 percent in the year-to-date.

(Additional reporting by David Brett; Editing by David Cowell)