European shares edged lower on Friday, giving up a small part of the previous session's strong gains, with Italian stocks lower after weak demand at a bond auction, serving as a reminder that the euro zone debt crisis is far from over.

Strategists remained upbeat, saying a deal struck by euro zone leaders to help resolve the bloc's two-year-old debt crisis

was inspiring confidence in investors, though gains may not be as spectacular as in recent days.

Today there is a slight air of caution. What the market is saying is that in principle the action taken at the EU summit was positive, but let's see more details and how it is implemented, said Bob Parker, senior adviser at Credit Suisse.

At 12:35 p.m., the FTSEurofirst 300 <.FTEU3> index of leading European shares was down 0.3 percent at 1,016.94 points, having surged 3.7 percent in the previous session to a 12-week closing high.

The index is down 9 percent in 2011 on worries about the euro zone debt crisis and slowing economic growth. But it is up more than 19 percent from a September low on optimism that policymakers are finding solutions to the crisis.

The Italian benchmark <.FTMIB> fell 1.8 percent after Italy sold 7.94 billion euros of government bonds, in a sale which found lower demand than at previous auctions. Yields at a sale of 10-year bonds hit a euro-era high. Many investors remain worried that the crisis could yet engulf Italy, the euro zone's third-biggest economy.

We haven't had a relief rally on Italian bonds, not the 20 to 30 (basis) points rally that you might have expected on the basis of equities' rally yesterday, Parker said.

Some financial stocks slipped back, after double-digit percentage gains on Thursday. Barclays and Axa fell 2 and 3.8 percent respectively.

RENAULT, ELECTROLUX GAIN

Company updates helped limit the index's losses. Solid third-quarter sales from French car maker Renault helped it rise 3.9 percent. World number two home appliances maker Electrolux rose 4.1 percent after its drop in earnings was not as bad as expected.

Mark Webster, head of European active equities at State Street in London, pointed to many companies having seen a positive share price reaction on the release of earnings, as a result of more realistic expectations.

People took the red pen out a bit sooner than in previous earnings seasons, with downgrades, he said.

He said the euro zone deal would also help investor sentiment. We've put a new base in place and the trading range will move up, he said.

The pan-European benchmark is up more than 10 percent so far this month and is on track for its biggest monthly rise since April 2009.

However, the index is approaching overbought territory in technical terms, with its 14-day relative strength index at 66. A value of 70 above is considered overbought.

On Thursday, the index broke through but fell back below 1,021.8, the 50 percent retracement of its fall from 2011 high in February to its low in September.

Edmund Shing, equity strategist at Barclays Capital, said equities were likely to recover further next week ahead of the G20 summit on November 3 and 4, as investors would not want to bet against policymakers for now, even though there were a lot of details to be worked out.

At the same time, he advised investors not to chase the market too aggressively.

The next key event is just in one week's time. Up until then, equities can probably make up further ground, Shing said.

(Additional reporting by Dominic Lau; Editing by David Holmes)