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An investor looks at an electronic board showing stock information at a brokerage house in China on Monday. ((Reuters))

European shares fell Monday after Chinese stocks plunged nearly seven per cent and Japanese shares weakened after the country's opposition party came to power in a landslide victory.

Germany's DAX 30 blue-chip index fell 0.7 per cent to 5,480.18, while France's CAC-40 was down 0.7 per cent at 3,668.34. The London Stock Exchange was closed for a public holiday, and end-of-August trading volumes were light, which can enhance volatility.

Dips in Chinese shares have sent ripples throughout markets in Europe and the United States, since China has continued to grow during the world recession. Questions about China's ability to sustain stimulus-fed growth rates have fuelled fears that any global economic recovery may not last.

In Shanghai, the main index plummeted 6.7 per cent to 2,697.70, adding to a nearly three per cent decline on Friday. Hong Kong's Hang Seng lost 1.9 per cent. Tokyo's Nikkei 225 stock average lost 41.61 points, or 0.4 per cent, to 10,492.53 after jumping more than 200 points earlier in the day.

Renewed selling in mainland Chinese shares reflected the growing unease among investors about government measures to restrict the lavish bank lending that's helped send markets surging this year.

Analysts also pointed to concerns about a flood of new shares as lockup periods expire and more initial public offerings come to market. The combination would mean less money to chase more stock.

Lan Xue, managing director and head of China research for Citigroup in Hong Kong, said China's markets are strongly linked to domestic liquidity, and July and August were shaping up as scaled-back periods for lending.

"This is very much contributing to the weakness in the A-share market," she said, referring to mainland Chinese shares. "Whether we'll see more declines depends on sentiment and liquidity the next few months."

Japan election sparks caution

In Japan, investors tread cautiously after the Democratic Party of Japan swept to power in national elections over the weekend amid frustrations with the ruling party as the world's second-economy emerges from its worst downturn in decades.

After spiking in the morning, stocks fell as initial enthusiasm over the opposition's victory quickly gave way to concerns about its economic policies and the surging yen. The Democrats are largely untested and there are worries their programs would increase Japan's already ballooning debt, analysts said.

Elsewhere, Korea's Kospi was down 1.1 per cent and India's Sensex dropped 1.7 per cent despite Asia's third-largest economy picking up pace in the April-June quarter. Australian shares were down 0.2 per cent.

As trading got underway in Europe, Britain's FTSE 100 added 0.8 per cent, but benchmarks in Germany and France were off by about 0.5 per cent. With Wall Street futures lower, U.S. markets were poised for more losses on Monday. Dow futures were down 58, or 0.6 per cent, at 9,478 and S&P futures shed 5.9, or 0.6 per cent, to 1,021.50.

The heavy selling in China, where quick economic growth and soaring equity prices have helped underpin optimism among Asia investors this year, weighed on sentiment across the region.

Chinese share prices rose more than 80 per cent earlier this year before falling back in mid-August. The months long rally coincided with unprecedented lending aimed at fighting off the economic downturn.

Many in China believe that a big chunk of the lending found its way into property and share markets, fuelling bubbles in asset prices, though the extent to which such funds were illicitly diverted into speculative investments remains unclear.