But Deutsche Postbank and its owner, Deutsche Post, gained on reports that Commerzbank and Allianz were planning a joint bid for Postbank.

At 0833 GMT, the pan-European FTSEurofirst 300 benchmark was down 0.8 percent at 1,335.87 points, led lower by miners Rio Tinto and BHP Billiton, which fell more than 2 percent on worries that BHP's bid for Rio would run into regulatory trouble.

Index-heavyweight oil stocks BP, Shell and Total fell 0.5-1.4 percent, as oil traded well shy of its record above $135 a barrel, though it resumed its relentless rise and added $1 to trade near $132.

Analysts said that inflation continued to be investors' main focus.

‘There's a speculative bubble on top of oil, with some expecting it to go to $200 -- but it could equally fall to $80 a barrel,’ said Justin Urquhart Stewart, investment director at Seven Investment Management.

‘There's a short-term wave of high inflation but the question is does it get embedded into something darker and deeper?’

Underscoring the negative mood in the market, data showed that euro zone services sector growth sank much more than expected in May as a strong euro and high oil prices ate away at companies' margins, while inflation pressures held at worrying levels.

The RBS/NTC Flash Eurozone Purchasing Managers Index for services companies, ranging from hotels to banks, fell to 50.6 in May from 52.0 in April, matching a 4-1/2 year low reached in January, and well below the 51.7 forecast by economists.

Across Europe, Britain's FTSE 100 fell 0.6 percent, Germany's DAX lost 0.4 percent and France's CAC fell 1 percent, weighed by auto and insurance stocks.

 Mining worries

The Wall Street Journal reported that BHP's proposed acquisition of rival Rio Tinto is facing increasing scrutiny from European regulators worried about the impact on steel prices.

‘BHP has to sell the deal as a positive, both to its own shareholders and Rio Tinto shareholders, and you know many of them are the same people,’ analyst Tom Gidley-Kitchin at Charles Stanley Stockbrokers said, adding that if the deal didn't go ahead it would hurt shareholders from both companies.

Other miners also traded lower, with Anglo American and Xstrata off 2.2 percent.

Deutsche Postbank rose 1.6 percent after media reports that Commerzbank and Allianz had expressed interest in jointly bidding for the bank. Commerzbank was up 0.9 percent and Allianz

down 0.3 percent.

Morgan Stanley raised Postbank to ‘overweight’ from ‘equAl weight’.

French auto stocks Renault and Peugeot fell more than 2.4 percent after Deutsche Bank cut its price target on Renault.

The FTSEurofirst 300 is down 0.3 percent so far this month after rallying 6 percent in April, and its progress through May has been stop-start: it has gained in nine sessions and fallen in seven.

Investors worry that stubbornly high oil and food prices will tie the hands of central banks and prevent the US Federal Reserve, which has cut rates by 2.25 percentage points this year, from serving up more equities-friendly rate cuts.