European equities edged lower on Thursday on the back of poor earnings from Commerzbank and Dexia and a gloomy report on the euro zone economy, though charts showed the weakness could be short-lived.

Commerzbank slipped 4.7 percent after its fourth-quarter results were hit by an almost 1 billion euros ($1.3 billion) writedown related to Greek sovereign debt, while Dexia fell 4.9 percent after reporting a 2011 net loss of 11.6 billion euros, hit by its exposure to toxic assets.

At 1315 GMT, the FTSEurofirst 300 index of top European shares were down 0.1 percent at 1,075.94 points after rising to a high of 1,081.47 earlier in the session. The index, which is up 7.5 percent this year, hit a seven-month high on Monday.

European auto shares fell 2.2 percent to top the decliners list. A London trader said that concerns about an economic recession in the euro zone weighed on the sector.

A report by the European Commission showed the euro zone's economy was heading into its second recession in just three years. Economic output in the 17 nations sharing the euro will contract 0.3 percent this year, reversing an earlier forecast of 0.5 percent growth.

It just reminds everyone that we're still in a mild crisis. People might have been hoping for an upward revision but that was a naive hope. It definitely felt all morning that sentiment was a bit fragile, Chris Beauchamp, analyst at IG Index, said.

Richard Greenwood, fund manager at Bedlam Asset Management, which manages $700 million, said a revision in euro zone growth numbers, although small, could have a large impact on company margins. But he was positive on the market's long-term outlook.

We are pretty agnostic on the short-term move, but see very strong prospects for equity markets over the next couple of years. We are positioned in companies with growth prospects, both through consolidation and restructuring.

Greenwood prefers consumer staples companies saying people still buy their products and they had pricing power. he was positive on flavours and fragrances maker Symrise saying consolidation was possible in the sector and demand was resilient.

TECHNICAL OUTLOOK

Charts showed the FTSEurofirst 300 index was still looking stable and likely to get support from an upward trend channel and a 21-day moving average, now at around 1,067 points.

We don't have major divergence signals. It looks like that this is a correction within the ongoing upward trend, said Phil Roberts, chief European technical strategist at Barclays Capital.

The broad-based recovery that we have seen so far this year is quite impressive. After a period of consolidation, we would be looking for a move towards 1,113 and 1,132 - the highs in July last year and the next resistance levels.

Some analysts favour Nordic and German stocks within Europe.

SEB, which has nearly $200 billion of assets under management, said positives for equities included cheap valuations, with Germany's price/earnings estimated at 10.7 times for this year versus a 10-year median of 17.6.

Germany's economic vitality ... has been an upside surprise in the past month, and the euro's weak exchange rate is fuelling the country's important export sector, SEB said in a note. Exposure to German companies thus has the potential to be a favourable investment.

German business sentiment rose to the strongest level in seven months in February, offering further evidence that Europe's largest economy is picking up steam and shrugging off a recession that is hammering other euro zone peers.

French bank Credit Agricole fell 3.5 percent after reporting a record quarterly net loss of 3.07 billion euros ($4.06 billion), performing worse than expected.