Weak energy and banking stocks pushed European shares lower on Thursday, while Air France <AIRF.PA> shares fell on news it was in tentative merger talks with ailing Italian airline Alitalia <AZPIa.MI>.
But takeover talk lifted shares in Imperial Chemical Industries <ICI.L> and French drinks group Remy Cointreau <RCOP.PA>, and a positive broker note on Spanish clothing retailer Inditex <ITX.MC> helped limit market losses.
The FTSEurofirst 300 index <.FTEU3> of top European shares was 0.4 percent lower at 1,460 points by 1150 GMT, having slipped from Wednesday's 5-1/2-year intra-day high of 1,476.5, but still 14.6 percent higher since the start of the year.
Volumes were lighter than usual as bank holidays in Japan and the United States kept many investors out of the markets, while a relatively thin earnings and economic agenda made investors reluctant to open new positions.
Hawkish comments by a European Central Bank official weighed on sentiment, adding to investors' worries about the toll that higher interest rates would take on euro zone economies.
ECB Governing Council member Miguel Angel Fernandez Ordonez said inflation risks were on the rise in the single currency bloc and that interest rates were still favorable for growth.
The ECB is widely expected to raise rates to 3.5 percent next month -- which would be the sixth increase since December last year -- in a bid to keep inflation in check.
Around Europe, London's FTSE 100 <.FTSE> index and Paris's CAC 40 <.FCHI> both shed 0.6 percent but Frankfurt's DAX <.GDAXI> dipped only 0.1 percent after a report showed an unexpected rise in German corporate sentiment in November.
The Munich-based Ifo research institute said earlier in the day that its business climate index, based on a monthly poll of around 7,000 firms, rose to 106.8 from 105.3 in October to equal a 15-year high as business expectations and firms' assessment of current conditions improved.
But the rest of the European markets were more negative, with London in particular weighed by heavily weighted energy stocks such as BP <BP.L>, which fell along with oil prices.
Financials added to market woes, with Credit Agricole <CAGR.PA> off more than 2 percent after Citigroup downgraded the stock to "hold," citing the bank's weaker-than-expected revenue trends in French retail banking, asset management and insurance.
Air France slipped more than 6 percent after Societe Generale downgraded the stock to "hold" and investors used in-line results and an announcement it was in exploratory talks with Alitalia as reasons to book profits on a stock that has rallied nearly 90 percent in the past four months alone.
On the upside, Imperial Tobacco <IMT.L> gained 1.7 percent after the top European Union court ruled that individuals must still pay duty on tobacco in their own country even if they order the product from another EU state.
