European shares closed lower on Thursday, ending a three-week rally that had pushed shares up to 18-month highs amid concerns over the ongoing "fiscal cliff" negotiations in the United States
The tax hikes and spending cuts that are set to come into effect in the new year remained a concern, and could send the world's largest economy back into recession.
The FTSEurofirst 300 Index provisionally closed down 0.5 percent at 1,133.89 points. The Spanish and Italian markets bucked the trend, closing higher.
Earlier there was positive news when euro zone finance ministers agreed to release a long-delayed 34.3 billion euro ($54.8 billion)
The European Union also agreed a deal on a single supervisor for top euro zone banks. Germany, which had opposed the plan, also agreed to the deal but said it must not be rushed.
The euro zone banking union paves the way for closer financial integration in the single currency zone with the supervisor monitoring the three biggest lenders of each country involved. It could be up and running by the end of 2013. The banking sector posted the best gains across Europe in morning trading before falling slightly lower.
Spain and Italy completed bond auctions of short term debt on Thursday morning. Both auctions ran smoothly: yields fell on three-year bills issued by both countries.
Among companies reporting earnings, UK-based company Sports Direct International released first-half earnings showing a 25 percent rise in profits with help from the London Olympics..
Stock in music retailer HMV hit a record low, tumbling 37 percent after it reported an operating loss for the last six months. It also said it was probable that it will face a covenant breach at the end of January.
Auto stocks showed the most losses in European indexes. Stock in Volvo fell over 5 percent after Renault announced it has sold its remaining stake in the car-maker. Peugeot shares were also down after it announced more job cuts as it edged towards restructuring the firm.