European stocks ended lower across the board on Friday, reversing the previous session's tentative recovery as banks resumed their decline, hit by a negative note from Goldman Sachs on the sector.
The FTSEurofirst 300 index of top European shares unofficially ended 1.2 percent lower at 1,164.14 points. The index, which has lost 2.4 percent on the week, is down 23 percent year-to-date.
Banco Santander shed 4.3 percent, Royal Bank of Scotland lost 3.2 percent, and BNP Paribas fell 2.8 percent. Bradford & Bingley plunged 18 percent.
The UK lender said it will increase its rights issue to 400 million pounds ($794 million) after U.S. investor TPG Capital pulled out of buying a stake as concern deepened about the lender's business plan.
"It has become almost 'politically incorrect' to have banking stocks in a portfolio," said Alain Bokobza, head of strategy at Societe Generale, in Paris.
Banking shares have been hammered by fears over the impact of the crisis in the credit markets that have forced banks to unveil multi-billion dollar asset writedowns and emergency capital increases.
The DJ Stoxx bank index, down 35 percent so far in 2008, shed 3 percent on Friday.
United States markets were closed for the Independence Day holiday.
European shares climbed on Thursday after the European Central Bank raised rates by 25 basis points as expected but indicated that no further moves were imminent. But that relief had faded by midday Friday.
Royal Bank of Scotland analysts expressed skepticism about the ECB President Jean-Claude Trichet saying he had "no bias" in favor of further rate moves.
"This is obviously surprising ... in fact it is difficult to believe -- given the amount of inflationary pressure in the region and globally," the note said.
Gerhard Schwarz, head of global equity strategy at UniCredit in Munich said the decision was a short-term positive as the wording of statements was not as hawkish as feared.
"But we cannot get any big relief as long as the overall stagflation fears hang over the market, and the oil price is a major factor in this. There will be a wave of downward pressure on equities after any recovery," he added.
Oil eased below $145 a barrel ahead of the holiday weekend in the United States and within sight of its all-time high of $145.85 hit on Thursday.