European stocks inched higher on Friday, reversing a small portion of the week's losses and mirroring a rebound in the euro currency, but simmering fears over the borrowing costs of a number of euro zone countries kept investors on edge.

Cyclical shares such as heavyweight miners were among the biggest losers, with Xstrata down 0.4 percent and Anglo American off 0.3 percent.

At 12:49 p.m., the FTSEurofirst 300 <.FTEU3> index of top European shares was up 0.1 percent at 958.88 points in relatively low volumes, on track to post a loss of 2.6 percent on the week.

The euro zone's blue chip Euro STOXX 50 <.STOXX50E> index was up 0.8 percent at 2,259.50 points, after testing its 50-day moving average, a strong support level from which the index has bounced over the past two weeks.

Banking stocks gained ground, with UniCredit up 2.6 percent and Credit Agricole up 0.3 percent.

Italian and Spanish government debt yields retreated and the euro rose as the European Central Bank bought bonds in the secondary market to ease the tension surrounding the two countries' debt levels.

But the gains in the euro -- which helped highly correlated banking shares pare early losses and turn positive -- was mainly seen as the unwinding of bearish bets on the single currency ahead of the weekend rather than a return of investor appetite for risk.

The euro's correlation with euro zone banking index <.SX7E>, which often makes it a gauge of risk-on/risk-off trade, has hit a two-year high, with the 25-day rolling correlation between the single currency and the index at 0.871.

The recent sharp rise in correlation between the different asset classes has rattled traditional long-only equity investors, making it more difficult to beat benchmark indexes and limiting their risks by betting on uncorrelated assets.

This market has been hell for stock pickers, with emotions running high, said Denis Beaudoin, CEO of Paris-based asset management firm Finaltis.

Quant models are more resilient in this context, they help investors navigate through the noise to manage risk and outperform the indexes. Just look at the quant funds' performances year-to-date, a lot of them are positive to just slightly negative while stock indexes are down, sometimes below 20 percent.

Around Europe, the UK's FTSE 100 index <.FTSE> was down 0.3 percent, dragged down by miners, Germany's DAX index <.GDAXI> up 0.6 percent, and France's CAC 40 <.FCHI> up 0.2 percent.

So far this year, the FTSE 100 is down around 8 percent, the DAX is down 16 percent and the CAC 40 is down 21 percent.

After tumbling to a 2-1/2 year low in late September, European stocks bounced back -- with the Euro STOXX 50 gaining as much as 30 percent -- but the recovery rally has been stalled this month by mounting fears over the finances of Greece and Italy and the risk of contagion to France and Spain.

The market has been marked by high intraday volatility, which has kept many long-term investors at bay, while short-term and derivative investors have been thriving.

'Long-term investment' used to mean 'five years'. It became 'three weeks' in 2010, and now it's 'three days'. No wonder why passive investors are getting smacked, said David Thebault, head of quantitative sales trading, at Global Equities.

The market is becoming completely irrational. France's credit default swaps are higher than the ones of Indonesia or the Philippines, and despite the fact that this week's French bond auction went relatively well, he said.

The problem is a lot of foreign investors are using the CDS --a totally illiquid and erratic market -- as a barometer for investing in euro zone stocks.

Global mutual funds remained net buyers of equities for the fifth straight week, though overall net inflows reduced significantly to $944 million (596 million pounds) for the week of November 10 to 16 after a net injection of $8.1 billion the previous week, Nomura said in a note.

By region, the United States saw an inflow of $3.2 billion, down from $7.3 billion the week before, while developed Europe suffered an outflow of $612 million.

(Additional reporting by Dominic Lau in London; graphics by Scott Barber and Vincent Flasseur in London; Editing by David Cowell)