European defense companies fell on Monday as talks over a potential peace agreement to end the war in Ukraine took a new turn.

President Volodymyr Zelenskyy said over the weekend that Ukraine was prepared to abandon the country's longstanding aim of joining the NATO military alliance in exchange for alternative security guarantees to protect it from Russia. Joining NATO is unlikely given some members' opposition, but the announcement marks a major policy shift by Ukraine.

Rheinmetall, Germany's largest arms manufacturer, closed 2.6% lower on Monday.

The company, which also makes air defense systems, anti-tank weapons, armored vehicles, and ammunition, led the sector's losses, as German counterparts Hensoldt and Renk slipped into negative territory.

Hensoldt, the military technology and surveillance specialist, was 1.8% at the close, while tank maker Renk fell 0.9%. Swedish fighter jet manufacturer Saab dropped 0.2%.

Zelenskyy's offer to ditch Ukraine's long-term NATO ambitions came during talks with U.S. officials Steve Witkoff and Jared Kushner, which are continuing this week. Kyiv is now seeking separate security guarantees from the West, which it sees as vital to any lasting ceasefire.

Zelenskyy said in a WhatsApp discussion with reporters on Sunday that such security guarantees would "provide an opportunity to prevent another outbreak of Russian aggression."

Russia remains steadfast in its opposition to any Ukrainian membership of NATO.

Protracted discussions on how to end the near four-year-long conflict — which entered a second day in Berlin on Monday — have thrust the continent's defense industry back into the spotlight.