By Ankika Biswas and Bansari Mayur Kamdar

(Reuters) -Portugal's shares fell sharply on Tuesday, underperforming the broader European index, after Prime Minister Antonio Costa quit over an investigation into alleged irregularities in handling lithium mining and hydrogen projects in the country.

Portugal's PSI 20 equity index fell 2.5%, with Mota Engil shedding 5.6% to lead losses in Lisbon.

"Markets just don't like the uncertainty," said Stuart Cole, head macro economist at Equiti Capital.

"We don't know what the outcome of this is going to be, who is the successor necessarily going to be and what this means for the direction of Portuguese economy. We'll have to wait and see if things will become clearer over the next few weeks."

Costa said his conscience was clear, but he would not stand as candidate for a fourth time as premier.

"The dignity of the functions of prime minister is not compatible with any suspicion about his integrity, his good conduct and even less with the suspicion of the practice of any criminal act," Costa said.

The pan-European STOXX 600 closed 0.2% lower, extending previous session's losses, having snapped a five-day gaining streak on Monday.

It had climbed more than 3% last week amid robust earnings and signs of an end to rate hikes by major central banks.

Some caution also persisted ahead of remarks from key central bank speakers this week, including U.S. Federal Reserve Chair Jerome Powell on Wednesday and Thursday.

"It's not that the enthusiasm over the peak in rate hikes has gone away… the only hope we have (against a weak macro backdrop) is to see inflation coming down and see the central banks talking a little bit more about rate cuts or at least mention it," said Michael Field, Europe market strategist at Morningstar.

ECB's vice president Luis de Guindos, meanwhile, said the euro zone's economy is likely to contract slightly or at best stagnate in the fourth quarter.

Energy stocks led sectoral losses with a 2.5% fall, tracking a sharp slide in crude oil prices on mixed economic data from China sparked worries about economic recovery in the world's second largest economy.

Miners eased 2.3% as copper prices also fell.

Capping losses, UBS gained 1.8% after posting better-than-expected underlying net profit in the third quarter and signalling that its core wealth business is stabilising, even as net profit missed expectations.

The financial services index rose 0.9%.

Watches of Switzerland soared 13.1% to the top of the STOXX 600 as it expects to more than double its annual profit by 2028.

AB Foods jumped 6.8% after the Primark-owner forecast "meaningful progress" in its new financial year.

Amadeus rose 5.3% as the Spanish travel booking group posted a higher-than-expected third-quarter adjusted net profit and announced the second buy-back share programme of the year.

Daimler Truck AG shed 4.6% after the German truckmaker missed third-quarter sales and earnings expectations.

(Reporting by Ankika Biswas and Bansari Mayur Kamdar in Bengaluru; Editing by Sohini Goswami and David Evans)