German and Italian shares fell 1% on Tuesday, leading declines across major euro zone bourses as European Union countries approved a weakened emergency plan to curb their gas demand.

The move comes after Russia's Gazprom said it would cut flows through the Nord Stream 1 pipeline to Germany to a fifth of capacity, seen as retaliation against Western sanctions over Russia's war with Ukraine.

Energy ministers approved a proposal for all EU countries to voluntarily cut gas use by 15% from August to March with compromise deals to reduce the cuts for some countries.

"Europe is clearly preparing for the occasion that they would be fully cut off from Russian gas," said Teeuwe Mevissen, senior market economist at Rabobank.

Credit Suisse cut its 2022 inflation adjusted economic growth forecast for the euro area to 2.3% from 2.4%, expecting the sharpest contractions in Germany and Italy.

"Even if rationing is avoided – the surge in gas prices driven by supply uncertainty will depress activity further," Credit Suisse European economist Veronika Roharova said.

Data on Monday showed Europe's biggest economy, Germany, was likely on the cusp of a recession. Last week, a survey showed euro zone business activity unexpectedly contracted in July.

German shares are down about 18% for the year, underperforming a broader pan-European STOXX 600 index which is down about 13%. Italian shares have lost more than 20% with a domestic political crisis adding to woes.

Investors also braced for a likely 75-basis-point interest rate hike by the U.S. Federal Reserve on Wednesday.

Worries about monetary policy tightening hitting economic growth and fears of an energy supply crunch have seen the STOXX 600 mark losses in five of the last six months.

On the day the STOXX 600 was flat. A rally in commodity stocks and a 2.3% jump in Unilever after upbeat results, were offset by a slide in retailers and Swiss bank UBS following a profit miss.

London's FTSE 100 rose 0.6%.

Retail stocks lost 2.6%, set for their biggest drop in six-weeks, hit by a profit warning from top U.S. retailer Walmart Inc, which cited surging prices for food and fuel affecting discretionary demand.

Europe's luxury stocks fell, with LVMH down 1.0%, while French liquor maker Remy Cointreau dropped 2.6% despite an earnings beat.

About 30% of the companies that are part of the STOXX 600 have reported results this earnings season, with 56% of them beating estimates, according to Refinitiv. (Reporting by Susan Mathew in Bengaluru; Editing by Shounak Dasgupta and Shailesh Kuber)