The pan-European STOXX 600 index fell 0.2%, following losses on Wall Street over worries about Senate runoffs in the U.S. state of Georgia.

UK's FTSE 100 rose 0.6%, boosted by oil majors Royal Dutch Shell and BP, as crude prices inched higher with deadlocked talks between major producers about potential changes in February output set to continue. [O/R]

The domestically focussed midcap index gained 0.9% as UK's finance minister Rishi Sunak announced plans to support businesses struggling under a third COVID-19 lockdown.

"The stock market reaction to a new lockdown in England could have been a lot worse, but it is fair to say there were plenty of signs in recent days that full lockdown was coming, such as similar restrictions being announced in Scotland yesterday," said Russ Mould, investment director at AJ Bell.

"Nonetheless, given the severity of the lockdown restrictions... one might have expected a repeat of last year's trends with lockdown losers slumping on the stock market and beneficiaries rallying. That's not entirely the case this time round."

European stocks rallied to fresh February highs on the first trading session in 2021 on Monday on hopes the vaccines will spur a speedy economic rebound.

The global mood dampened on Tuesday ahead of the Senate election outcome, which could have a big impact on incoming U.S. President Joe Biden's ability to pursue his preferred economic policies. [MKTS/GLOB]

Stocks considered as safe-havens like utilities, healthcare and food & beverage were among the biggest sectoral decliners in Europe.

Germany's DAX index dropped 0.6% with the government looking to extend a lockdown, while France's CAC 40 slipped 0.4%.

Retailers were a bright spot, with Britain's Next jumping 8.0% after it said its Christmas sales were much better than expected.

Shares in Marks and Spencer, Morrisons and Tesco rose between 0.2% and 1.2% after market researcher Kantar said British grocery sales hit a record high in December.

German chipmaker Dialog Semiconductor PLC gained 2.7% after it gave an upbeat fourth-quarter revenue forecast due to strong demand for 5G phones and tablets.

ASML rose 0.2% after analysts at RBC and Liberum raised their price targets on the stock.

(Reporting by Amal S and Sruthi Shankar in Bengaluru; Editing by Sriraj Kalluvila)

By Amal S and Shreyashi Sanyal