European shares closed lower yesterday after European Central Bank President Jean-Claude Trichet once again signalled he might raise interest rates next month, while corporate earnings came in mixed.

Diageo fell on dashed hopes the drinks group might raise its targets and Belgian bank and insurance company KBC tumbled after hinting at second-half profit weakness.

Shares in cosmetics giant L'Oreal climbed two per cent, however, after the firm reported healthy profits and forecast another year of strong growth.

The pan-European FTSEurofirst 300 index of leading shares unofficially closed 0.27 per cent down at 1,371.9 points, after hitting a 3-1/2 month high on Wednesday. The narrower DJ Stoxx 50 fell 0.34 per cent to 3,523.1.

European shares have recovered most of the ground lost in May and June's sharp fall which was sparked by fears of rising inflation. However, some market players feel stocks are destined for another correction.

"Three years of equity gains have been driven by improving corporate fundamentals. That appears close to an end," Paul Niven, head of asset allocation at F&C Asset Management, said in a note as the fund firm moved to underweight on equities.

"We expect a re-emergence of growth concerns in the near term and markets appear overly bullish at present, with deteriorating dynamics," he added.

The ECB kept rates on hold at three per cent as expected but Mr Trichet said "strong vigilance" was needed on inflation, supporting market expectations of an October increase.

"Overall, I would say it's fairly hawkish and it's not a surprise. We were looking for strong vigilance and it was already there in his first sentence," said Elwin de Groot, Senior Market Economist at Rabobank.

"It is clearly giving signs that there will be a move in October and beyond that it is giving fairly clear signals that that will not be the end."

Around Europe, Germany's DAX slipped 0.23 per cent, France's CAC 40 fell 0.34 per cent and Britain's FTSE 100 was 0.54 per cent weaker.