European stocks inched lower early on Monday, halting the sharp rally they began in late July, but the losses were limited by growing expectations of bold action by the European Central Bank (ECB) to lower the borrowing costs of Spain and Italy.

Basic resource stocks led sectoral fallers in early deals, down 0.6 per cent, with platinum producer Lonmin dropping 4.9 per cent on concern over lost production after a labour strike in South Africa turned violent last week and left more than 40 people dead.

Deutsche Bank dropped 1.8 per cent, the biggest loser among Europe's blue chips, after the New York Times reported on Saturday that US prosecutors are investigating the German lender and several other global banks over business linked to Iran, Sudan and other nations currently under international sanctions.

At 0716 GMT, the FTSEurofirst 300 index of top European shares was down 0.06 per cent at 1,109.64 points, losing steam after surging to a 13-month high on Friday.

'The prospect of the ECB stepping in is removing most of the systemic risks, so stock pickers are back,' a Paris-based equity and ETF sales trader said.

'But that said, the gains over the past few weeks are substantial, and we could go sideways until the ECB finally announces its plan.'

A German magazine reported over the weekend that the ECB is considering setting interest rate thresholds for purchases of struggling euro zone countries' bonds, a move that would discourage speculators from pushing yields above the level set by the euro zone's central bank.

The euro zone's blue chip Euro Stoxx 50 index was up 0.3 per cent at 2,479.13 points, testing a long-term descending trendline formed by 2007 and 2011 peaks, seen as a major resistance level.

Around Europe, Britain's FTSE 100 index was flat, Germany's DAX index up 0.1 per cent and France's CAC 40 up 0.1 per cent.

The CAC 40 triggered a bullish technical signal known as a 'golden cross' on Monday when its 50-day moving average crossed above its 200-day moving average.

The cross, used by a number of algorithmic trading programmes as an automatic 'buy' trigger, followed similar bullish signals on the DAX and the FTSE 100.

Spain's IBEX was the top gainer among European indexes, up 0.5 per cent, though it was halted by a strong resistance level, its 200-day moving average.

The Spanish benchmark has surged 26 per cent since ECB President Mario Draghi said in late July the central bank was 'ready to do whatever it takes to preserve the euro', sparking expectations of strong measures to help lower Spanish and Italian bond yields.

'Investors want to believe in an intervention from the ECB, but we need to get the details about how it would do it, and in that sense, the month of September will be key,' said Barclays France fund manager Thierry Claude, who recommends using trailing stops at this point.

'This strategy allows investors to benefit from the rally while protecting recent gains in case of a reversal.'

Investors will focus on several important events in the coming weeks to get a better view of the market's medium-term outlook, starting with this week's meeting between Greek Prime Minister Antonis Samaras and the leaders of France and Germany.

On Sept. 6, the ECB is expected to spell out, at its monthly policy meeting, how it might intervene in the bond market.

On September 12 Germany's constitutional court will deliver a ruling on the euro zone's permanent rescue fund, the ESM, which Berlin cannot ratify without court approval.-Reuters