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By Riva Gold 

Stocks fell while the British pound dropped to three-month lows Monday amid escalating concerns over the U.K.'s access to the European Union's single market.

London's FTSE 100 index snapped a 14-session winning streak, while the Stoxx Europe 600 slumped 0.8% in its worst day since November, led lower by the banking, insurance and auto sectors. U.S. markets were closed for the Martin Luther King holiday.

British newspapers reported over the weekend that Prime Minister Theresa May could hint at an end to the country's participation in the single market in a speech on Tuesday.

The British pound was down around 1.1% at $1.2055 late afternoon in London after dropping to $1.1987 earlier in the session, according to FactSet, around its lowest since the "flash crash" in October.

"Europe is the largest single trading partner on the U.K.'s doorstep," said Paul Griffiths, chief investment officer for fixed income and multi asset solutions at First State Investments. "The market is reacting to the risk that there is going to be limited or even no deal-driven access."

The pound has fallen roughly 19% since the June 23 referendum on EU membership. While Mr. Griffiths thinks the U.K. currency will be volatile until the terms of Brexit become clear, "I suspect the reality will be less significantly bad than markets are discounting," he said.

The U.K. could change its economic model if it isn't granted access to trade in the EU, U.K. Treasury Chief Philip Hammond said in a weekend interview with German newspaper Die Welt. Separately, President-elect Donald Trump said in The Times that he would offer the U.K. a quick and fair trade deal.

The IMF also lifted its growth forecast for the U.K. on Monday. Still, the export-heavy FTSE 100 index fell 0.2% Monday after settling at record highs for 12 sessions, as declines in shares of banks and financial institutions offset gains in the mining sector.

"Access to the single market is pivotal to London attracting so many businesses and financial services," said Vasileios Gkionakis, currency strategist at UniCredit.

The euro fell 0.5% to $1.0594, while the dollar fell 0.4% against the yen to Yen114.1320 as investors flocked to safer assets.

In government bonds, the yield on the 10-year German bund fell to 0.256% from 0.266% Friday, while U.K. gilt yields fell to 1.320% from 1.358%. Yields move inversely to prices.

Italian 10-year notes climbed to 1.909% from 1.894% after ratings agency DBRS downgraded the country. Some analysts said the decision could add to pressure on Italian bank shares, which fell 1.8%.

Elsewhere in Europe, shares of Essilor International were up roughly 12% after the French optical-lens maker agreed to merge with Italian frames maker Luxottica Group, which added around 8%.

German auto shares were broadly lower after Mr. Trump suggested over the weekend that car makers would have to shift manufacturing to the U.S. in order to do business there and singled out BMW, Daimler and Volkswagen.

Shares of Fiat Chrysler Automobiles were also down over 4% following reports the German Transport Minister called on the European Commission to force it to recall vehicles alleged to use illegal software.

Earlier, Japan's Nikkei Stock Average fell 1% to its lowest close since December as the stronger yen dragged down shares of exporters.

Hong Kong's Hang Seng Index fell 1% in its worst day of the year, while the Shanghai Composite Index dropped 0.3%, recovering from steeper losses earlier in the session as the Shenzhen Stock Exchange came under pressure.

Australian markets climbed 0.5%, however, lifted by gains in utilities and mining companies as iron ore prices strengthened. Gold rose 0.5% to $1,202 an ounce.

Later this week, focus will likely turn to U.S. corporate earnings and the Jan. 20 inauguration as investors await clarity on the new administration's policy priorities.

Between the U.K. and the U.S. this year, "I think we have unprecedented political uncertainty," said Mr. Gkionakis. "We simply don't know what May is going to say tomorrow or what Trump is going to say in the inauguration speech."

William Boston, Friedrich Geiger and James Glynn contributed to this article.

Write to Riva Gold at riva.gold@wsj.com

(END) Dow Jones Newswires

January 16, 2017 12:28 ET (17:28 GMT)

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