European shares hit a near two-and-a-half-year peak before closing lower yesterday as gains in UK banks such as HBOS after a series of positive updates were offset by a spike in oil prices and a fall in the dollar.
Alliance & Leicester became the latest British bank to rise on the back of its full-year trading update, gaining 1.7 per cent after confirming its performance was in line with market expectations.
Rivals performed even better, with HBOS up a further 2.9 per cent following its upbeat trading update on Tuesday, while Lloyds TSB extended its gains after another well-received statement on Monday, adding 2.7 per cent.
The FTSEurofirst 300 index of pan-European blue chips closed 0.1 per cent lower at 1,037.8 points, having earlier hit a peak of 1,042.4 points, its highest since July 2002.
The narrower DJ Euro Stoxx 50 index finished down 0.4 per cent at 2,921.9 points.
Stocks have enjoyed a four-month surge that has added more than 10 per cent to the Eurofirst 300, and many strategists see further short-term gains.
"I wouldn't be surprised if we have a reasonably strong run into the New Year given the background on Wall Street, where despite the woes of the US deficits and the dollar, the market doesn't seem too concerned," said Stuart Fraser, investment director of European equities at Standard Life Investments.
The impact of the weak dollar on European earnings and the level of demand from China were likely to be key issues in the New Year, Fraser said, adding he expected Chinese growth to remain robust.
"If there is going to an inflection point away from a stronger market, it may be because of a major round of dollar-related (earnings) downgrades."
The dollar retreated yesterday with the euro rising back above $1.34 after data showed a sharp fall in US capital inflows in October.
Surging oil prices also kept a lid on gains, with US light crude jumping more than four per cent to above $43.50 a barrel after data showed a decline in US heating oil supplies as cold weather started to bite in the north-east.
On Wall Street, the blue-chip Dow Jones industrial average was 0.1 per cent weaker at 10,662.8 points, while the Nasdaq Composite Index also fell 0.1 per cent to 2,158 points by 1733 GMT.
Around Europe, London's FTSE 100 closed 0.1 per cent higher, Zurich's SMI fell 0.2 per cent, Paris's CAC-40 shed 0.3 per cent and Frankfurt's DAX closed 0.4 per cent weaker.
Retailers were in focus, with fashion chain Hennes & Mauritz up 2.8 per cent after posting a 24 per cent rise in November sales, helped by a special sale of clothes by designer Karl Lagerfeld.