Germany underperforms rival European stocks

London - European equity markets gained ground on Monday, buoyed by stronger bank and chemical stocks, although a slump in carmaker Volkswagen hit the German market.

Volkswagen's shares slid 15% after Volkswagen told US dealers to halt sales of some 2015 diesel cars after regulators found software it designed for the affected vehicles gave false emissions data.

Volkswagen launched an investigation into the matter and could face penalties of up to $18bn, the US Environmental Protection Agency (EPA) said.

The drop in Volkswagen hit other carmaker stocks, with BMW and Daimler down around 4%, while Germany's DAX fell 0.7%.

"The commencement of legal proceedings against VW by the US EPA is profoundly serious," analysts at Bernstein wrote in a note.

The DAX underperformed gains elsewhere in Europe, with the pan-European FTSEurofirst 300 index and the eurozone's blue-chip Euro STOXX 50 index both advancing 0.3%.

The broader European equity markets were steadied by firmer banking and chemical shares.

Spanish bank Santander rose 1% after Citigroup upgraded the stock to "buy" from "neutral".

Chemicals company Bayer progressed 1.2% after Bayer's plastics division Covestro said it aimed to raise about €2.5bn in an initial public offering (IPO).

Some investors remained concerned by an economic slowdown in China, but others said such worries had been overdone.

"We believe sentiment is too bearish regarding near-term Chinese growth momentum. Infrastructure orders are likely to pick up to meet budget shortfalls that were made during the first half. We note Chinese house prices are now up for four months in a row," said JP Morgan equity strategist Mislav Matejka.

Greece's stock market edged down 1% after the leftist Syriza party's election victory, with yields on government paper edged lower. Investors' focus turned from the election to the formation of the new cabinet and the implementation of the country's third bailout.

Athens' main ATG equity index is down nearly 20% since the start of 2015, underperforming a 3% gain on the FTSEurofirst.