By Pranav Kashyap and Shashwat Chauhan
(Reuters) - European shares closed higher on Monday as a soft business activity reading strengthened the case for more monetary policy easing by the European Central Bank this year, with rate-sensitive sectors such as real estate and utilities rising.
The pan-European STOXX 600 index closed 0.4% higher, recouping some losses following its biggest one-day drop since August in the last session.
Autos led gains among major STOXX sectors with a 1.9% advance while retail also gained 1.2%.
A survey showed euro zone business activity contracted sharply and unexpectedly this month, as the bloc's dominant services industry flatlined while a downturn in manufacturing accelerated.
"A payback from the Paris Olympics was largely expected. But today's release was much worse than many had anticipated, suggesting a rather gloomy underlying growth picture for the eurozone," said Fabio Balboni, senior economist, eurozone at HSBC.
The downturn appeared broad-based with Germany, Europe's largest economy, seeing its decline deepen while France - the currency union's second biggest - returned to contraction following August's Olympics boost.
Germany's DAX closed 0.7% up while France's benchmark ended near flat, bogged down by falling bank stocks.
French banks including Credit Agricole (EPA:CAGR), SocGen and BNP Paribas (EPA:BNPP) were among top declines on the STOXX index with the euro zone banks index sliding 1.8%.
The euro slipped against the dollar while the yield on the German two-year bond, which reflects near-term rate expectations, slipped to 2.149%. [GVD/EUR]
Rate-sensitive real estate rose 1.3% while utilities, often traded as a bond proxy, gained 1.1%.
The ECB cut interest rates in June and also earlier this month.
Global equities rallied last week after the U.S. Federal Reserve opted for jumbo rate cut on Wednesday. Focus will now shift to commentary from policymakers to gauge the rate cut outlook.
Rate decisions in Switzerland and Sweden later this week will also be on investors' radar.
Among individual stock moves, Germany's Commerzbank (ETR:CBKG) slid 5.7% after Berlin said it does not support a takeover by Italy's UniCredit. UniCredit shares closed 3.3% lower.
AstraZeneca (NASDAQ:AZN) lost 1.7% after its experimental precision drug developed with Daiichi Sankyo did not significantly improve overall survival for patients with a type of breast cancer in a late-stage trial.
Aurubis dropped 10.1% after Europe's largest copper producer guided for lower earnings next financial year as it expects metal prices to fall, and after hurdles with a production ramp-up hit its fourth-quarter earnings.