European Shares Close Near 17-Month High

European stocks finished higher in choppy trading Friday, after German lawmakers approved a plan to ease the conditions on bailout loans to Greece and amid ongoing discussions over the U.S. budget.

The FTSEurofirst 300 rose, having jumped 1.1 percent on Thursday to its highest close since July 2011 on expectations U.S. politicians would reach a deal to stop the world's biggest economy falling off a " fiscal cliff" of tax rises and spending cuts.

(Read More: What is the "Fiscal Cliff")

"We're going to be playing a little bit of tennis as far as comments are going to be concerned from the U.S. politicians over the coming weeks, unfortunately, over how close we are to getting anything done with the fiscal cliff issue," Alastair McCaig, analyst at IG, said.

Still, some investors are taking a positive stance.

"I would say that both sides have no interest in going over the cliff," Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels, said. "I think there will be some kind of agreement over the next week, or week and a half, maybe a little bit longer. Markets will anticipate that, so the underlying tone of the market will clearly be strong."

In the euro zone on Friday, Germany's parliament approved a fresh bailout for Greece by a large majority. The package of measures was aimed at cutting Greece's debt load to 124 percent by 2020.

Also on Friday, European Central Bank President Mario Draghi said that budget tightening across the euro zone could come into effect in early 2013 but predicted a recovery in the second half of the year. "We have not yet emerged from the crisis," Draghi told Europe 1 radio. "The recovery for most of the euro zone will certainly begin in the second half of 2013."

Shortly afterwards, jobs data for the euro zone bloc was released showing unemployment hit a record high for October. Meanwhile, inflation data for November showed that consumer prices had eased slightly.

In stocks news, most of the main movers across European markets were affected by downgrades by investment banks. Credit Suisse raised its rating on Johnson Matthey o outperform. Stock in the chemicals company rose by 0.54 percent.

Goldman Sachs upgraded luxury retailer LVMH to a buy; shares rose by 2.78 percent.

German cement maker HeidelbergCement was upgraded to overweight; shares led the German DAX Index rising by 2.6 percent.

Andritz was on the receiving end of a downgrade by HSBC to underweight; shares fell by 1.08 percent.

Spanish banks also came under pressure again on Friday. Shares in Bankia and Banco Popular were both down after the bank were told earlier in the week that they must shrink their balance sheets.