European stocks slumped on Monday after a rout in Chinese markets, wiping hundreds of billions of euros off leading shares and sending one benchmark index to a seven-month low.

The pan-European FTSEurofirst 300 fell 3.2 per cent to 1,381.77 points by midsession, taking roughly 270 billion euros off the value of shares.

The index sank to its lowest level since January, having lost over a trillion euros in market value since the start of the month as China's devaluation of the yuan stoked fears of global economic deflation.

Chinese stocks plunged more than 8 per cent on Monday, in their biggest one-day loss since the height of the global financial crisis in 2007 after Beijing held back expected policy support at the weekend following last week's 11-per cent slide.

"The events in China are clearly serious and demonstrate that the development model there is struggling to maintain growth," Taube Hodson Stonex Partners fund manager, Mark Evans, said.

VOLATILITY RISES

The STOXX 600 Basic Resources Index, whose constituents are mostly mining stocks, and the energy sector fell 5.9 per cent and 4.2 per cent respectively, as commodities slumped to multi-year lows, China being one of the world's biggest users of metals and oil.

Shares in banks and asset managers also fell sharply, while the Euro STOXX Volatility Index rose 4.8 points to its highest level since October 2014 - more evidence of investor unease.

Nevertheless, strategists at JP Morgan Cazenove and Taube Hodson Stonex's Evans said that the sell-off may have been overdone.

"Momentum may carry developed markets lower - the U.S. in particular has risen so strongly and to such a high valuation that a correction was due," Evans said.

"European markets have not re-rated to anything like the same extent and remain attractively valued in our view - though they too may sag a bit further."

However, strategists at Societe Generale warned that their basket of European stocks with strong business ties to China, which includes carmakers and luxury goods companies, might come under more selling pressure in the near-term. – Reuters