Brokers at work at the Frankfurt stock exchange on March 9, 2012 (AFP/File, Daniel Roland)
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Equities also fell after a subdued session in Asia, as the Bank of Japan's plan to boost the economy disappointed many investors.
In midday deals, London's FTSE 100 index of top companies dipped 0.09 percent to 6,175.45 points.
Frankfurt's DAX 30 index lost 0.24 percent to 7,730.35 points after falling more heavily in earlier trading, and in Paris, the CAC 40 index shed 0.35 percent to 3,749.99.
In foreign exchange activity, the European single currency rose to $1.3352 from $1.3313 late in New York on Monday. On the London Bullion Market, gold prices increased to $1,693.38 an ounce from $1,687.50.
"Volatility has picked up this morning, with the DAX selling off ... on rumours amongst dealing desks that bad news could be due concerning a German bank," said trader David White at Spreadex.
"The rumours were short-lived, however, and the market soon picked up enough stock for prices to stabilise. Needless to say, this is a market that doesn't appear to need a great deal of persuasion to sell."
On a more upbeat note, German investor sentiment has struck the highest levels since the start of the eurozone debt crisis in 2010 as the outlook for Europe's top economy continues to brighten, a survey found on Tuesday.
The widely watched investor confidence index calculated by the ZEW economic institute soared to 31.5 points in January from 6.9 points in December.
That marked the highest level since May 2010, when Greece had to be bailed out and the sovereign debt crisis began to unfold.
"A clearly better-than-expected ZEW number, showing a surge in economic optimism managed to lift Dax out of the misery it suffered this morning," added Anita Paluch at trading firm Gekko Global Markets.
"ZEW managed to give a push in the right direction. As the environment, in which Germany's trading partners operate still remains fragile though, this will undoubtedly influence the economic growth of the European growth machine."
In company news, Britain-based brewer SABMiller announced that revenues swelled by 17 percent in its third quarter, or three months to December, compared with a year earlier.
In reaction, the maker of Foster's, Grolsch, Miller Lite, Peroni Nastro Azzuro and Pilsner Urquell saw its share price gain 0.63 percent to 2,979.09 pence.
Asian markets traded mixed on Tuesday, with Tokyo's Nikkei falling and the yen strengthening as the Bank of Japan's plan to boost the economy fell flat.
After a two-day meeting the central bank said it would adopt a two percent inflation target demanded by the country's new government while also launching an open-ended asset-purchase scheme.
Tokyo enjoyed an initial and brief surge after the announcement, jumping into positive territory, but soon fell back as investors read the details.
The Tokyo stock market finished 0.35 percent lower, Hong Kong gained 0.29 percent and Seoul won 0.49 percent, while Sydney was flat and Shanghai fell 0.56 percent in value.
US markets were closed on Monday for the Martin Luther King Day, while President Barack Obama was sworn in for a second term.