By Josie Cox 

The Russian ruble hit a fresh record low against the dollar Monday, burdened by continued fighting in Ukraine over the weekend and European Commission President José Manuel Barroso's warning that the situation was approaching "a point of no return."

The dollar rose by 1.2% to 37.50 against the ruble in early trade, surpassing a previous record set Friday. By the end of the day, some of that move had been retraced, but year-to-date the ruble is still down more than 12% against the greenback.

Neil Mellor, a currency strategist at BNY Mellon, said the market had been somewhat complacent during parts of last month, but that recent developments have reignited investor fears. "The ruble is in free fall, which is a source of serious concern," he said.

In equities, Moscow's Micex closed the session 0.5% lower while the dollar-traded RTS declined by 1%, taking the former's losses to 3.5% since last Monday and the latter's to almost 7%.

On Sunday, Ukrainian government forces lost more ground to Russian-backed separatists in heavy fighting in the east of the country. On Saturday, European leaders threatened to impose more sanctions on Moscow if it doesn't end its support for the rebels.

"While guns are firing there is no way one could expect the market situation to normalize," said Igor Akinshin, a dealer at Alfa Bank in Moscow. "The peak hasn't passed yet."

Egor Fedorov, an analyst at ING Bank in Moscow added that pressure was also being heaped on the ruble by reports the U.K. has proposed banning Russian banks from the SWIFT network.

"That could result in short-term disruptions in interbank payments and security settlements," Mr. Fedorov said.

European stocks largely lacked direction Monday, as investors attempted to gauge the implications of geopolitical tensions as well as data showing that manufacturing activity in the euro zone slowed even more sharply than first estimated in August, due in part to a weaker performance than first forecast from Germany.

The Stoxx Europe 600 added 0.25% on the day, while U.K's FTSE and Germany's DAX gained 0.1%. France's CAC was unchanged at close. The S&P 500 was trading flat on the day too, a whisker above the 2,000 mark.

In debt markets, a bid for core-European debt perceived to be safe during times of stress sent yields on two-year French government bonds into negative territory for the first time ever. Other countries where yields on short-term bonds are negative include Germany, Holland, Austria, Finland and Belgium.

The euro continued its slow slide against the greenback, touching a near-year low of $1.3119, before recovering slightly, ahead of rate announcements from both the European Central Bank and the Bank of England later in the week.

Several banks, including BNP Paribas, RBC and Nomura, expect the ECB to trim interest rates in a further bid to fuel the sluggish recovery, highlighted anew with Monday's PMI data.

Last month, ECB President Mario Draghi hinted that the central bank could be preparing further stimulus, even raising the prospect of quantitative easing. Some economists have since said, however, that the ECB is likely to want to gauge the impact of its June measures and assess the take-up of the targeted longer-term refinancing operation before taking further action.

Back in equity markets Swiss drug maker Novartis AG led the pan-European index, adding more than 4% after a positive testing of its LCZ696 heart drug. Fabian Wenner, an analyst at Kepler Cheuvreux, raised his target price to 87 Swiss francs from 81 francs.

France's Iliad SA, which is trying to buy U.S. operator T-Mobile, was the biggest loser on the index, tumbling 8.8% after reporting a fall in first-half net profit on Friday.

In commodities markets Brent crude oil lost 0.5% to trade at $102.66 a barrel, while gold added 0.1% to $1,288.0.

-- Andrey Ostroukh in Moscow contributed to this article

Write to Josie Cox at josie.cox@wsj.com