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European Shares Close Lower; Banks Weak

European shares closed lower on Friday as U.S. politicians continued to wrangle over averting the "fiscal cliff" — a series of tax increases and spending cuts that are set to kick in at the start of next year and could tip the U.S. economy into recession.

The FTSEurofirst 300 Index traded lower as uncertainty over a fiscal deal continues to worry global markets and on weakness in the banking sector.

With time running short to find a solution before the holidays, the White House said it would work with Congress to avoid the cliff and that President Obama was hopeful a deal can be reached quickly.

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CAC 40
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IBEX 35
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"The odds of the U.S. slipping over the fiscal cliff have clearly risen. In a moment of bad political misjudgment, John Boehner tried to take a deal through Congress that clearly failed to have the President's support, only for it to be rejected by hawks in his own party," Rebecca O'Keeffe, head of investment at Interactive Investor said in a morning note.

"The market still expects agreement to be reached, but as we head towards the final week of the year, many investors will be reluctant to hang up their stockings and take a break as the issue goes down to the wire."

Elsewhere, in the U.K, a report from the Parliamentary Commission on Banking Standards has said that the government should consider a break up of banks, if necessary. Drastic action could be needed to ensure financial stability and to prevent taxpayers having to bailout lenders in future, the report said.

The report said that planned reform of Britain's banks was a step in the right direction but more action could be needed.

Barclays and Lloyds both fell. The banking sector posted some of the biggest losses across European markets. Italy's BMPS also declined after the European Central Bank said that state aid given to the bank could pose more challenges to its performance and its debt burden.

Shares in BAE Systems traded higher after the aerospace and defense firm said it had signed a 2.5 billion pound deal to supply aircraft to Oman.

Steelmaker ArcelorMittal wrote down 4.3 billion dollars of its European business on Friday citing weakened demand.

Swedish building firm Skanska announced it will take a hit on its operating profit following write downs on its Latin American units.