By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- Italian banks steered European stock markets lower on Monday after nine of the country's banks failed the European Central Bank's stress tests.

Disappointing data on German business confidence also bruised investor appetite.

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.

Emerging as the most troubled lender in Europe, Banca Monte dei Paschi di Siena shares plummeted 22%, closing at the lowest level on record. The ECB found that the Italian bank needs to find EUR2.1 billion in fresh capital to meet the stress-tests requirements. Already on Sunday, the bank said it has hired Citigroup and UBS to help with options to plug the hole and a possible solution could be a merger or even a sale, according to a person close to the matter.

In total, nine Italian banks failed the tests, but five of them have already plugged their capital holes. Remaining banks are Banca Carige , down 17% in Monday's trade, Banca Popolare di Milano , down 4.4%, and Banca Popolare di Vicenza. The losses weighed on the FTSE MIB index , which closed 2.4% lower at 19,028.67. Read: Banks shares catch a cold even after surviving health check

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 1.8% in London.

Ifo data: European stock markets were also hit by data from the Ifo Institute showing 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.

Broader market reaction: The Stoxx Europe 600 index fell 0.6% to close at 325.10, after trading as high as 330.06 earlier in the day.

Germany's DAX 30 index dropped 1% to 8,902.61, while France's CAC 40 index lost 0.8% to 4,096.74. The U.K.'s FTSE 100 index slipped 0.4% to 6,363.46. Read: Banks knock FTSE 100 lower after stress tests

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