By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- European stock markets erased earlier gains on Monday after data showed German business confidence has fallen to a 22-month low.

Markets had opened firmly higher after the European Central Bank and the European Banking Authority said most of the region's lenders passed their stress tests.

Ifo data: Data from the Ifo Institute showed business confidence in Germany fell to a 22-month low in October, down to 103.2 points from 104.7 points in the previous month. The figure was also below analysts' expectations of 104.5, in a poll by The Wall Street Journal last week.

"The outlook for the German economy deteriorated once again," the institute said in the release.

Bank stress tests: Twenty-five banks flunked the European Central Bank's stress tests that were released on Sunday, as they face a capital shortfall of 24.6 billion euros ($31.2 billion). However, 13 of those lenders have already taken steps to beef up their capital buffers.

Shares of Commerzbank rose 2.8%, one of the biggest gains in the Stoxx Europe 600 index . Banco Popular Español SA rose 1.1%, Deutsche Bank AG (DB) climbed 0.3%, and UniCredit SpA added 0.1%. All those banks were among the lenders that passed the ECB's stress tests, an indication the central bank believes they are strong enough to weather a financial storm.

British banks were not subject to the ECB's stress test, but were instead assessed by the European Banking Authority. All four U.K. banks in the test were given a green light, although Lloyds Banking Group PLC (LYG) only narrowly passed. Lloyds shares were down 2.2% in London.

Market reaction: The Stoxx Europe 600 index fell 0.6% to 325.34, after trading as high as 330.06 earlier in the day.

Germany's DAX 30 index dropped 0.7% to 8,927.81, while France's CAC 40 index lost 0.6% to 4,102.06. The U.K.'s FTSE 100 index slipped 0.4% to 6,361.80.

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