European stocks fell on Monday in choppy trading driven by political turmoil in debt-laden Italy, where bond yields hit euro-era highs, though equities pared losses on hopes Italian Prime Minister Silvio Berlusconi was about to resign.

Strategists said political developments would continue to overshadow fundamental drivers in the short term, even as investors braced for a raft of results on Tuesday.

The FTSEurofirst 300 index of top European shares fell 0.6 percent to close at 974.66 points, having been down almost 2 percent in early trade. Volume was light, at 87 percent of the 90-day average.

Financial stocks were generally lower, with the STOXX Europe 600 Banking Index down 0.9 percent. The index has lost a third of its value this year, with several banks suffering losses on bonds in the euro zone peripheral economies.

French group Natixis was among the biggest losers in the sector on Monday, down 6.2 percent.

But Italy's benchmark index outperformed, up 1.3 percent, to claw back some of Friday's heavy loss. Banking heavyweight Intesa SanPaolo rose 2.8 percent, ahead of results on Tuesday, and after falling 4.8 percent on Friday.

Berlusconi has a terrible track record on reform. Markets are hoping whoever (would replace) him can only be better. We are down to guessing on political newsflow. Forecasting economics and markets is hard enough but forecasting political newsflow is nigh on impossible, said Daniel McCormack, equity strategist at Macquarie.

Italian government bond yields rose, with the 10-year up 23 basis points to 6.61. Analysts say yields above 7 percent would make funding costs questionable. Italy faces a key vote on public finance on Tuesday.

While Italy's funding costs are approaching the sort of level other euro zone countries reached when they needed to be bailed out, there may not be enough money to bail Italy out. This would take the currency bloc's crisis to a new level.

Meantime, a new regime in Greece is likely to inherit the task of pushing through the harsh measures required as conditions of Greece's latest bailout, further cutting spending, privations and firing public sector workers.

Strategists at Societe Generale see in the relative resilience of the currency a sign of hope for euro zone stocks, down 20 percent from early July.

Although euro equity markets have been under the spotlight in the last three months and a wind of panic swept through the world, forex markets has been subdued which suggests the disappearance of the single currency is no longer seen as an option by investors, they said in a note.

Forex markets now believe there is no reason to call the existence of the euro into question and, contrary to what could have been expected a year ago, the euro did not collapse following the Greek tragedy.

EARNINGS EFFECTS

Vodafone and Societe Generale are among companies reporting on Tuesday. Strategists said the European earnings season had been uninspiring and had prompted analysts to cut forecasts for future earnings.

It has been a mixed season and there has been a lot of guiding down, McCormack said. The European economic cycle is decelerating quite sharply now. Cheap valuations might prevent much more downside for European shares, he said.

Equity valuations on Thomson Reuters Datastream showed the STOXX Europe 600 carrying a one-year forward price-to-earnings of 9.5, compared with 11.7 for the S&P 500 , with U.S. earnings having produced more surprises on the upside.

Among individual companies, telecom gear maker Alcatel-Lucent fell 7.7 percent, after plunging 17.1 percent on Friday, when it slashed its full-year profit target, saying operators were cutting spending on networks. Volumes were twice the average for the past 30 days.