The pan-European STOXX 600 <.STOXX> index was down 0.5 percent at its close, giving up earlier gains and falling from its highest level since December 2015.

Equity markets reversed course after a coalition of U.S. states and municipalities began legal action against President Donald Trump's administration, accusing it of violating federal law by delaying energy efficiency standards for several consumer and commercial products.

The oil and gas sector index <.SXEP>, which had risen to a nine-week high earlier in the session, turned negative to end 0.6 percent lower. [O/R]

Within the sector, British mid cap Tullow Oil (>> Tullow Oil plc) fell 2.6 percent, Italy's Eni (>> Eni SpA) was down 1.5 percent and Spain's Repsol (>> Repsol SA) declined 1.2 percent.

Likewise Europe's basic resources <.SXPP> index also ended 0.1 percent lower after spending much of the session in positive territory.

Banking stocks <.SX7P> were the biggest laggards, with the sector dropping 1.4 percent. Banks and commodities-related stocks have enjoyed a rally as investors bet on a reflation trade, based on expectations of increased infrastructure spending and tax cuts.

The trade gathered pace after Trump was elected U.S. President in November, but has been under pressure after his healthcare bill failed last month.

Among European lenders, Banco Popular (>> Banco Popular Espanol SA) was the biggest faller, plunging more than 10 percent after the Spanish lender said an internal audit identified the need of adjustments to its accounts with most of the adjustments related to doubtful loans.

"Another unhelpful development which does little to restore confidence in the balance sheet," Jefferies analysts said.

Banco Popular also said that its CEO is to step down. Spain's IBEX <.IBEX> index ended 1.3 percent lower.

Among the biggest risers, dealmaking helped shares in engineer WS Atkins (>> WS Atkins PLC) rocket 26.6 percent after it confirmed that it had received a buyout offer from Canada's SNC-Lavalin.

Outside the STOXX index, London-listed Imagination Tech (>> Imagination Technologies Group plc) slumped more than 61 percent after Apple (>> Apple Inc.) said it would stop using its graphics technology in the iPhone and other products.

Traders said the heavy losses in Imagination also weighed on German chipmaker Dialog Semiconductor (>> Dialog Semiconductor PLC), which counts Apple among its biggest customers. Dialog fell 2.3 percent.

Broker Northern Trust says Apple's decision to ditch Imagination is likely a one-off, and any weakness in Dialog and peer AMS (>> ams AG) was a buying opportunity.

(Reporting by Kit Rees and Danilo Masoni, editing by Pritha Sarkar)

By Danilo Masoni