European share prices slipped back in thin trade on Tuesday, breaking a four-session rally as the euro zone's still uncertain political response to its sovereign debt crisis gave investors pause on the eve of the U.S. third-quarter earnings season.

The fate of the euro zone's EFSF rescue fund was snagged on getting the approval of Slovakia's parliament, where a key vote was delayed by the government on Tuesday in the face of opposition from a member of its four-party coalition. The proposed expansion of the fund's powers has already been approved by fellow euro zone states.

Sentiment is still somewhat bearish; there still isn't any clear resolution to the debt crisis, a London-based portfolio trader at a U.S. investment bank said, while the Slovakia vote delay shows how difficult it's going to be to get this coordinated.

Eastern European lender Erste Group Bank led fallers, down 6.1 percent in a 0.3 percent weaker FTSEurofirst 300 , a day after the Austrian bank warned it would make a loss this year and not pay a dividend.

While Erste's exposure to Greece -- expected by many in the market to default sooner or later -- is less marked than peers, increased talk of a bigger than expected writedown on private holdings of Greek debt also weighed.

Greek lenders were among the worst hit, with Alpha Bank (ACBr.AT) and Bank of Pireaus (BOPr.AT) both down around 19 percent in a 2 percent weaker Greek bourse that saw heavy trading volumes.

The Greek banks would also be among the hardest hit by plans, revealed by banking sources on Tuesday, for the European authorities to subject the banking sector to a new stress test which could require them to raise in aggregate an additional 100 billion euros of capital.


However, the decline in the FTSEurofirst 300 index gave back just a portion of Monday's 1.7 percent rise and comes after the index added more than 10 percent in its four-day rally.

I wouldn't read too much into the pull-back, after the massive gains in recent days; the market is still very volatile, very low conviction; stocks are moving sharply on little newsflow, Jacob de Tusch-Lec, fund manger at Artemis, and who manages 40 million pounds ($62.7 million), said.

What we've had so far is a lot of closing of European banks shorts, that have made a lot of money; some people minimising their underweight (position) in order not to lose out on a continuing grind higher in the banks, pretty much a positional rally. The next question is will they have the conviction to take an overweight position?

The rally had been supported by recent U.S. data, said Neil Dwane, chief investment officer, Europe, at RCM, a unit of Allianz Global Investors, although the pace of it was extraordinary.

I don't find that level of volatility reassuring. It doesn't feel to me like a bull market, it feels like a market that is struggling for direction. Volumes remain quite low and the market, both up and down, is being driven by positioning.

Dwane said he remained sceptical about the outlook for the political handling of the euro zone crisis, but third-quarter corporate results, which begin in the United States with Alcoa later on Tuesday, could steer the longer term direction for the market.

We already know the banks are going to be a disaster ... but it's what the companies say about 2012, Dwane said.