Stocks firmed on Friday on hopes that U.S. jobs data due later in the day will show a stronger outlook for the world's biggest economy, but the euro hit a 16-month low on worries over the region's economic health and further debt sales due next week.
European shares edged higher ahead of the closely-watched U.S. nonfarm payrolls report, due at 1330 GMT, and after stronger-than-expected private sector jobs data on Thursday.
The FTSEurofirst 300 <.FTEU3> index of top European shares was up 0.27 percent at 1,016.04 points.
Non-farm payrolls are expected have risen by 150,000 in December but hopes for an even stronger number were driven by a Thursday's survey showing private sector hiring surged last month. Initial jobless claims meanwhile dropped 15,000 in the latest week.
Bank shares gave up their small early gains, with the STOXX Europe 600 Banking Index <.SX7P> 0.06 percent lower following big losses in the previous two sessions and UniCredit
Fears over the outlook for euro zone banks have grown since the Italian lender was forced to offer new shares at a deeply discounted price to shore up its crisis-ravaged balance sheet. UniCredit stock has fallen around 30 percent in the last two sessions and was down over 8 percent on Friday.
Commercial banks parked a new record 455 billion euros ($582 billion) overnight at the European Central Bank on Thursday, indicating they still prefer security with low interest rates to lending at higher rates to each other.
More costly emergency overnight borrowing fell to 1.861 billion euros, the lowest since November 28, easing some concerns about banks' scramble for funds.
The more banks give back to the ECB is an indication that there is less trust in other institutions, a euro zone money market trader said.
The previous record high for overnight deposits was on Wednesday. Banks are currently returning to the ECB around two-thirds of a total 685 billion euros it has lent them, including from last month's unprecedented three-year liquidity operation.
The euro was up 0.1 percent on the day at $1.2798, having earlier hit a low of $1.2763 on trading platform EBS, its weakest since September 2010.
Euro-denominated assets are being undermined by deep-rooted concerns about a possible default by the region's strugglers, notably Greece, and expectations that some top-rated euro zone economies including France will be downgraded.
Yields on Italian and Spanish debt rose ahead of next week's bond auctions, seen as a test of whether weaker euro zone states will be able to refinance maturing debts. Italian 10-year paper was trading above the 7 percent level viewed as unsustainable for public finances.
Market players cashed in on German bonds before the U.S. jobs data, with the Bund future 18 ticks lower on the day at 138.61, after rallying 70 ticks in the previous session.
Renewed worries about Greece's ability to meet debt repayments, Spain's public finances and Austrian banks' exposure to struggling Hungary should limit any sell-off in safe-haven German debt, however.
There are rising concerns in Europe about Greece, the budget deficit in Spain ... so clearly the environment remains favorable for a bid for safety, so the Bund will continue to outperform (and) spreads are still under widening pressure, said Patrick Jacq, rate strategist at BNP Paribas.
I would say that whatever U.S. data (emerges) this afternoon, the risk will continue to be a key driving force.
Markets are also awaiting a meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel on Monday for fresh hints on steps they may take to resolve the crisis.
As the vulnerable euro and European shares whetted appetite for safe-haven assets, gold was on course for its best week in a month at around $1,622 an ounce.
ECB bond buying: http://link.reuters.com/pax23s
Euro zone debt crisis: http://r.reuters.com/hyb6
ADP vs non-farm payrolls: http://link.reuters.com/wuk85s
($1 = 0.7817 euros)
(Additional reporting by Jessica Mortimer and Atul Prakash; Editing by Ruth Pitchford)