European stocks closed narrowly mixed in choppy trade yesterday ahead of a health check on the banking system designed to show whether it is strong enough to withstand any fresh shocks.
Dealers said sentiment got a boost from much better-than-expected British and German economic data but investors were reluctant to take up the lead until the results of the bank stress tests were known.
Banks provide the credit that drives business and any suggestion that they were still struggling in the fallout from the global financial crisis would badly hit confidence in them and the economic recovery, they said.
In London, the FTSE 100 index of leading shares closed virtually unchanged at 5,312.62 points. In Paris, the CAC 40 index added 0.18 per cent to 3,607.05 points and in Frankfurt the DAX was up 0.39 per cent at 6,166.34 points.
Dealers said that after recent solid gains, it was no surprise that the markets were hesitant and wanting to see the bank test results despite the British and German figures.
"After a strong week... it is maybe not too surprising that markets have paused for breath," said David Jones, chief market strategist at IG Index.
"There is of course another factor... the results of the stress test on European banks," Mr Jones said.
He said much faster-than-expected second quarter British growth figures helped sentiment but that was not enough on the day.
"July has so far been a good one ... and we have seen some impressive rallies but it will take more strength into next week to convince the sceptics that this really is the start of a sustainable recovery after the turmoil of recent months."
Dealers said key to that will be a convincing CEBS report which bolsters investor confidence.
Most expected the majority of the banks to be passed fit but there were some doubts about how rigorous the tests would be and if there was any suspicion they were less than exacting, then investor confidence could be hit.
Lloyds Banking Group economist Kenneth Broux said before the close that the "markets are less than convinced about the rigour and credibility of the tests."
Investors "appear reluctant to take regulators for their word over their assessment of capital buffers and the treatment of sovereign debt exposure under a worst case economic scenario or credit event," he said.