By Sruthi Shankar, Ragini Mathur and Purvi Agarwal

(Reuters) -European stocks fell on Thursday as concerns over U.S. fiscal health kept Treasury yields elevated, while data showing weak euro zone business activity added to the gloom.

The pan-European STOXX 600 index closed 0.6% lower, logging its biggest single-day fall since early April, and retreated further from a two-month high touched earlier this week.

Investors have been grappling with lack of progress on trade deals as well as U.S. President Donald Trump's sweeping tax cut plans, which have raised concerns about ballooning U.S. debt and sent government bond yields surging.

"There's a bit of nervousness around how large the U.S. deficit has been structurally for a given period of time. You're going to have a very uncertain picture with regards to growth and a certain outlook for deteriorating public finances," said Iain Barnes, chief investment officer at Netwealth.

The benchmark 10-year U.S. Treasury yield was hovering around three-month highs on worries that U.S. government debt would swell by trillions of dollars, as the House of Representatives passed Trump's tax-cut bill.

Following the U.S., yields on German long-term bonds hit a two-month high while ones on euro zone bonds edged up modestly, pressuring stocks.

Adding to the dour mood, HCOB's preliminary composite eurozone Purchasing Managers' Index dropped to 49.5 this month from 50.4 in April, and the bloc's dominant services industry suffered a deeper downturn in demand in a clear sign of the impact of U.S. tariffs on the eurozone economy.

All sectors on the benchmark STOXX 600 were lower, with personal and household goods, and automobiles and parts the biggest losers.

"Markets had been doing pretty well and are taking a little bit of a sense check on how far they've gone... It seems they've run out of good news for the time being," Barnes said.

Chemical stocks were flat, as losses were offset by an over 30% jump in Johnson Matthey after the British chemicals firm agreed to sell its unit to Honeywell International for 1.8 billion pounds ($2.4 billion), including debt.

The stock logged its biggest percentage gain on record, and topped the STOXX 600 index.

Tomb Raider owner Embracer fell 17% to the bottom of the benchmark index after it forecast slight revenue growth and broadly unchanged earnings for its fiscal 2025/26 and said that at least one of its nine AAA game releases slated for the following two financial years would be pushed back.

Freenet AG slid 16.7% after the German telecoms firm reported its first-quarter numbers.

(Reporting by Sruthi Shankar, Ragini Mathur and Purvi Agarwal in Bengaluru; Editing by Sherry Jacob-Phillips, Tasim Zahid and Ed Osmond)