Commerzbank was down on talk it is trying to seal a deal for Dresdner.
Commerzbank fell 1.1 percent and Dresdner's owner Allianz gained 1.4 percent after sources close to the matter told Reuters that Commerzbank was racing to buy Dresdner by the end of this week.
"Commerzbank needs to intergrate (Dresdner) and experience shows that this can be rather difficult," said a trader, who said the sale would be a relief for Allianz.
"The clearly positive sign is that the raw material oil and food prices are on the decline and the inflation outlook is more favourable," said Tuomas Komulainen, Helsinki-based strategist at Danske Market Securities.
Across Europe, Germany's DAX was down 0.2 percent and France's CAC was down 0.6 percent.
TWO MONTHS OUT OF TEN?
The FTSEurofirst 300 is down 0.6 percent so far this year, and a strong finish to August would take it into positive territory for only the second month in the last ten.
Shares have been battered by a global credit crisis stemming from a collapse in risky U.S. mortgages, which has slowed the economy and threatens to hit corporate profits further in the second half.
Underlining the difficulties faced by banks in particular, Denmark's central bank and a vehicle of the Danish financial sector are to buy to out Roskilde because no other offers, foreign or domestic, had been received for the bank.
Shares in Roskilde were suspended.
Airlines were in focus after Lufthansa formally announced its interest in acquiring a stake on offer in Austrian Airlines . Lufthansa fell 1 percent and Austrian jumped nearly 7 percent. Stock in another possible buyer, Air France-KLM, fell 1.3 percent.
Analysts said that the weak European economy would take its toll on earnings, but added that stocks had been battered so much — the FTSEurofirst is down more than 22 percent this year — that it would make little difference to share prices.
"We will probably have more earnings disappointments in Q3 and Q4, especially compared to bottom-up analysts' forecasts," said Komulainen, who added that cyclicals would be worst hit by Europe's slowing economy.
"But they are not a major factor any more as prices already discount them," he said.
With little scheduled on the corporate front, investors will train their sights on U.S. home sales data due at 1400 GMT.
