EUROPE MARKETS: European Stocks Slip As Ukraine-Russian Tensions Escalate

By Carla Mozee, MarketWatch

LONDON (MarketWatch) -- European markets turned lower after a Russia's foreign minister said Moscow will defend the economy if it comes up against another round of sanctions related to the conflict in Ukraine.

Any new measures from the European Union or the United States will force Russia to "protect our economy, protect our social sphere, protect our businesses and at the same time draw conclusions from the actions of our partners on their adequacy," Russian Foreign Minister Sergei Lavrov was quoted by Reuters as saying Monday.

On Saturday, EU leaders agreed to draw up options for new sanctions within a week if Russia doesn't pull back its intervention in Ukraine. Read: Ukraine loses ground to rebels.

The comments came as Pro-Russian rebels and Ukrainian forces were fighting near the Luhansk airport in eastern Ukraine on Monday, according to the BBC, with the battles talking place before new round of Russia-Ukraine talks was set to begin. Lavrov said negotiators should prioritize an "immediate cease-fire" when they meet in Minsk to talk about the months-long conflict. On Saturday, Ukrainian President Petro Poroshenko said his country was moving toward "a point of no return -- full-scale war" against Russia.

Market reaction: The Stoxx Europe 600 turned lower in mid-morning trade, losing 0.1% to 341.52, with Germany's DAX 30 index down 0.3% at 9,445.96. German stocks in recent weeks have felt the weight of worry among investors about the German economy and the impact of sanctions on trading partner Russia.

Trading volumes in European markets were lighter than usual, with close of trade in the U.S. for the Labor Day holiday.

Russia's blue-chip MICEX index was down 0.2% to 1,398, while the Russian ruble reached a record low against the U.S. dollar, according to The Wall Street Journal. The greenback (USDRUB) was recently buying 37.4455 rubles, compared with 37.1605 rubles on Friday.

France's CAC 40 index fell 0.4%, and the U.K.'s FTSE 100 was off 0.1%, with Tesco PLC shares extending losses after Friday's profit warning.

Economic data: Germany also received downbeat, though expected, confirmation that its economy shrank in the second quarter. Gross domestic product contracted 0.2% on adjusted terms after growth of 0.7% in the first quarter, according to figures from government agency Destatis.

Meanwhile, a report from Markit showed German factories in August logged their most sluggish month since September 2013. The figures were part of a headline measure that showed activity in the euro zone's manufacturing sector fell to 50.7 from 51.8 in July. The final activity reading was slightly lower than the preliminary estimate of 50.8.

The euro (EURUSD) was little changed after the euro-zone economic data, trading around $1.3136. But it was down from Friday's level of around $1.3170.

Comments: "Russia's escalation of the conflict in Ukraine has taken a toll on the internationally exposed manufacturing sector, and that effect could yet worsen further in the coming months, given recent confidence drops in the more directly exposed core European economies," said Robert Wood, chief U.K. economist at Berenberg, in note about a slowdown in the U.K. manufacturing sector. Data from Markit/CIPS released Monday showed the sector expanded at the slowest pace in 14 months in August.

Subscribe to WSJ: http://online.wsj.com?mod=djnwires