European shares fell on Friday after sources said credit rating agency Standard & Poor's was set to go through with a long-mooted downgrade of several euro zone countries, weighing on sentiment for riskier assets such as equities.

French TV, citing a government source, said France would be downgraded. A senior euro zone government source said Germany and the Netherlands would not be hit, while a second source just said several countries would be affected.

The expectation is that some of the largest and richest economies in Europe are being downgraded. Markets are being cautious ahead of the announcement, said Richard Batty, strategist at Standard Life Investments. The S&P announcement is expected after the close of U.S. markets at 2100 GMT.

It's a reminder to investors that we are not seeing a comprehensive road map for the euro zone economies to get out of this fiscal mess. We're not seeing a move towards fiscal union.

Batty said he remained underweight in European equities, but was overweight on U.S. equities. He pointed to consumer confidence data that suggested further recovery in the world's biggest economy, one factor in limiting the fall for shares in a choppy session.

U.S. consumer sentiment picked up steam in early January, rising to the highest in eight months as Americans grew more optimistic about job prospects, a survey showed.

The pan-European FTSEurofirst 300 index of top shares fell 0.1 percent to close at 1,017.84 points, after going as high as 1,026.81 and as low as 1,007.86. Over the week, the index rose 0.4 percent, its fourth week of gains.

Autos were among the biggest losers, down 1 percent, giving up some of their recent gains. The sector has been one of the strong performers in 2012, up more than 11 percent.

Some traders played down the significance of the possible S&P downgrades.

It isn't like we have not seen this coming, and I think this is reflected in the way equity markets have moved lower, but not to the degree that we would have seen a number of months ago, said Will Hedden, sales trader at IG markets.

BANKS GAIN

European shares had been in positive territory earlier, helped by an Italian debt auction in which yields dropped. Italy raised the maximum amount planned but could not match the same level of interest as at Thursday's Spanish debt sale, at which twice the planned amount of bonds was snapped up.

Banks, many of which have large exposure to regional debt, such as Italy's risky bonds, went in and out of positive territory. The STOXX Europe 600 Banking Index ended 1.2 percent higher.

It was not the best auction ever, but we did not see a substantial sell-off and there is a glimmer of hope things are improving in the euro zone, said Angus Campbell, head of sales at Capital Spreads.

Bond and FX investors took a less sanguine view of the Italian auction. Italian secondary market bond yields rose and the euro weakened against the dollar.

The FTSEurofirst 300 index is up 19.3 percent from a 2011 low it hit in September, and has tested its 200-day moving average in recent days. A break above this level would be a positive sign for equities.