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* Tech sector boosts markets globally

* Banks, oil, travel stocks hit by lockdown fears

* Prosus rallies to an all-time high

(Updates to market close)

By Sruthi Shankar

Jan 25 (Reuters) - European shares closed at two-week lows on Monday as a slump in German business morale underscored the damage from tighter COVID-19 restrictions, while investors feared a slow vaccine rollout could further delay an economic recovery.

The pan-European STOXX 600 index reversed early gains and finished 0.8% lower. The German DAX fell 1.7%, France CAC 40 was down 1.6% and the UK's FTSE 100

declined 0.8%.

The Ifo economic institute's business climate index fell to 90.1 in January from an upwardly revised reading of 92.2 in December, while a Reuters poll had forecast a reading of 91.8.

The German economy, Europe's largest, will likely reach its pre-pandemic levels in mid-2022, according to a draft document prepared by the economy ministry, seen by Reuters.

"German Q1 GDP now looks likely to fall by at least 1% qoq, assuming that the restrictions for retail and services will only be gradually lifted after Feb. 14," Deutsche Bank's chief economist, Stefan Schneider, wrote in a note.

"Hence, our 4-1/2% forecast for the year as a whole looks somewhat ambitious, but given the overall uncertainty we currently see no real need to lower it."

Economy-linked banking , auto , oil & gas

and travel & leisure stocks took the biggest hit, falling between 1.9% and 3%.

Markets took a turn for the worse after U.S. drugmaker Merck

said it would end development of its two COVID-19 vaccines.

Pfizer announcing delays of nearly a month to its COVID-19 vaccine shipments to the European Union earlier this month, while AstraZeneca has announced a large cut in supplies to the bloc.

British Prime Minister Boris Johnson said he was looking at toughening border quarantine rules because of the risk of "vaccine-busting" coronavirus variants.

British Airways-owner IAG , Ryanair , Lufthansa and Air France KLM fell between 3.3% and 7.7%, while retailers fell 1.5%.

Several Spanish regions ramped up anti-coronavirus measures, while France was looking at a third national lockdown.

Technology stocks gave back early gains, but losses were modest as their U.S. peers traded at all-time highs.

Finnish telecom equipment maker Nokia jumped 12.9%, while technology investor Prosus gained 3.6% to hit an all-time high.

Investors sought refuge in defensive sectors such as telecoms and healthcare which gained 0.9% and 0.7%, respectively.

French state-controlled power group EDF slumped 15.6% to the bottom of STOXX 600 after broadcaster BFM Business reported that the European Commission wanted a further six months of talks on a planned restructuring.

A source in the French finance ministry denied the report.

(Reporting by Sruthi Shankar in Bengaluru; Editing by Arun Koyyur, Subhranshu Sahu and Nick Macfie)

((sruthi.shankar@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 6182 2787;))