European stocks ended higher Thursday, following a fairly mixed session, as investors took confidence from a Federal-Reserve-induced rally in the previous U.S. trading day. But, cautionary comments by the Bank of England's Monetary Policy Committee members dragged many British banks into the red.
"My fear of the recession in the U.S. is perhaps greater than I thought it was a month ago and perhaps greater than others think," MPC Member David Blanchflower said to the U.K. parliament's Treasury Committee on Thursday, Reuters reported.
Barclays, Royal Bank of Scotland and HSBC closed firmly in the red following Blanchflower's comments, which dragged the European banking index and the FTSE-100 off its earlier highs.
The Bank of England said it will offer commercial banks emergency funds with longer repayment terms when it lends money next month, to ease potentially tight money markets at the end of the year.
Analysts said the bank seems to be caught between a rock and a hard place when it comes to monetary policy.
In addition to the risks on growth, "they've also got an inflation risk. The problem is they don't know which risk they have to place emphasis on," Karen Ward, from HSBC, told "European Closing Bell."
Volatility in the banking sector will likelycontinue as the extent of the exposure to bad loans and efforts to rescue troubled banks come to light.
Beleaguered German bank IKB delayed the release of its first-half results again, to implement accounting changes.
Fears of rising losses at an offshore operation set up byIKB to invest in subprime mortgages -- and which is now housed at state development bank KfW -- have recently hammered the German bank's shares.
Shares started the day 5 percent lower, but ended up 2.4 percent after KfW saidthat a pool of banks will secure $520 million of risks at IKB.
Friday's opening is likely to hinge on what Federal Reserve Chairman Ben Bernanke will say in his speech after markets close. Fears of a deterioration of the U.S. economy, despite the healthy 4.9 percent growth in the third quarter, are on the rise.
"I think recession is too strong a term (for the outlook of the U.S. economy)," Joseph Stiglitz Nobel Laureate, Economic Sciences told "Worldwide Exchange."
"The US economy will be performing at significantly below potential," Stiglitz added.