European markets slide after Brexit speech; Sterling on track for biggest rise since 1998

European markets closed just below the flatline Tuesday after the U.K. Prime Minister Theresa May outlined her priorities for the upcoming Brexit negotiations.

The pan-European Stoxx 600 (^STOXX) was 0.15 percent lower with the food and beverages sector leading the declines.

The FTSE 100 (FTSE International: .FTSE) dropped almost 1.5 percent lower after Theresa May pledged to fully leave the EU's single market and to take the Brexit deal to a parliamentary vote.

Sterling rose more than 2.7 percent against the U.S dollar following May's Brexit speech , putting it on track for its biggest daily increase since 1998.

"Sterling, which has been a proxy for investors' perceptions of UK politics and their fears about the consequences of Brexit, has entered a more dangerous and volatile phase," Nicholas Spiro, partner at Lauressa Advisory said in an email.

Kallum Pickering, senior U.K. economist at Berenberg, told CNBC in an email that Brexit could reduce growth in the U.K. by 0.4 percentage points.

"By lowering growth in trade, investment and migration with the UK's biggest market (EU) we expect our Brexit base case to reduce UK potential growth to 1.8 percent per year from its pre-referendum rate of 2.2 percent. The accumulated costs of Brexit could add up badly over time."

Meanwhile, in the U.S., the Dow Jones industrial average opened lower as investors hoping for the blue-chips index to surge beyond the 20,000 threshold were forced to wait. U.S. markets were closed on Monday as the country celebrated Martin Luther King Day.

Banking stocks moved higher on Tuesday. The European Central Bank said it foresees bank lending to pick up in the first quarter.

Shares of Lufthansa (XETRA:LHA-DE) reached the top of the European index on Tuesday after an Italian newspaper said the German airline was in merger talks with Etihad Airways. Both airlines told CNBC that they don't comment on speculation.

Reynolds American announced Tuesday a merger deal with British American Tobacco. British American Tobacco will buy 57.8 percent of Reynolds for $59.64 per share. Its shares were down almost 3.6 percent.

Rio Tinto, the world's biggest mining company, maintained Tuesday its guidance of 330 million-340 million tonnes of iron ore for 2017. Its shares fell more than 1 percent.

Rolls Royce was among the best performers on Tuesday, up by more than 6 percent. The British aero-engine maker said it had reached a settlement over a bribery probe and presented higher-than-expected profits in 2016.

The potential purchase of the Italian Mediaset company by France's Vivendi could be at risk. According to Italian media, regulatory authorities in Italy think the acquisition is not "judicially acceptable". Mediaset was down by more than 3 percent.

Casino, the French retailer group, said its profits beat its 2016 target but its shares moved higher at lunchtime trade. Renault said Tuesday its sales rose by more than 13 percent in 2016 and expects continued growth over the coming months both in Europe and in international markets, Reuters reported. Its shares were up 1.9 percent.

The Chinese President XI Jinping opened the World Economic Forum in Davos saying that nobody would emerge as a winner in a trade war. This was the first time a Chinese president ever attended the forum.

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