(Reuters) - European stocks were higher early Tuesday afternoon, hitting a two-month high on sharp gains in cyclical mining shares, while simmering concerns over the euro zone crisis sent French and Spanish markets lower.
The FTSEurofirst 300 index of top European shares was up 0.7 percent at 1,018.60 at 1226 GMT, a level not seen since late October.
The euro zone's blue chip Euro STOXX 50 index was flat at 2,369.87 following early gains, halted by resistance at 2,403, a peak hit in early December.
Spanish stocks dropped, with the IBEX down 1 percent, as investors digested a comment from economy minister Luis de Guindos that Spain's public deficit for 2011 may be higher than the 8 percent of GDP forecast by the new government.
That revived fears Spain could face a prolonged period of tight budgets and economic contraction.
It shows that Spain is in a very tough situation and that the new government will have to beef up the austerity measures that have already been announced, said Arnaud Poutier, co-head of IG Markets France.
Sacyr was down 1.6 percent, Banco de Sabadell down 1.3 percent, and Banco Santander down 0.9 percent.
France's CAC 40 also lost ground, hit by profit taking on big pharma Sanofi after a 22 percent rally since late November, as well as by a drop in top banking shares.
Societe Generale was down 2.7 percent, Credit Agricole down 2.1 percent, and BNP Paribas down 1.3 percent as investors were quick to cash recent gains on the stocks with the end of the Christmas truce on the credit ratings front.
French banks have underperformed European pears over the past few months, hurt by worries France will lose its triple-A rating.
This year is going to be about geographical allocation: more on resilient Germany and UK, less of the weakest euro zone countries, with Belgium increasingly looking like the next domino to fall, Agilis Gestion fund manager Arnaud Scarpaci said.
In other countries, Germany's DAX index was up 1 percent, boosted by sharp gains in automakers such as BMW , up 3.3 percent, while Britain's FTSE 100 index was up 1.2 percent, propelled by strong gains in miners such as Rio Tinto, up 5.6 percent.
Europe will remain the focus of markets through at least the first quarter of 2012, JP Morgan Asset Management said in a note in which it continued to favour a defensive stance in European equities, targeting large market capitalisations with good dividend yields.
If the theme for last year was 'muddle through', this year will be 'grind through', as the slow slog of budget cutting and reform dominates. Sceptical investors will need to see tenacity and commitment from governments before they return to buying non-risk-free sovereign debt, it said.