European shares inched lower on Thursday with Germany's benchmark index pulling back from a record high and Spanish stocks rebounding from heavy losses in the previous session driven by escalating tensions over Catalonia.

The pan-European STOXX 600 index index and Germany's DAX were both down around 0.2 per cent by 0848 GMT, while Spain's IBEX was up 0.7 per cent, the biggest gainer among top country indexes in Europe.

Spanish equities investors cautioned that political uncertainty could hurt the economy after Catalonia's separatist leader said the region would move on Monday to declare independence after a referendum that authorities in Madrid declared illegal.

“Political uncertainty may well impact investment sentiment towards Spain in the coming weeks and months, and will likely spill over into the economy,” Banco Inversis wrote in a note.

A quarterly Reuters poll published on Thursday showed that Spanish stocks were expected to end 2017 up nearly 14 per cent, a sharp cut from the 20 per cent rise seen in the previous poll.

Poll medians predict the DAX to rise 13 per cent this year and surge another 5 per cent in 2018. France's CAC is seen up 11 per cent and 7 per cent in 2017 and 2018, respectively, while Italy's FTSE MIB is the front-runner to end 2017 as the best performing country index.

Top fallers on the STOXX were shares in Assa Abloy , down 4.7 per cent, after news that CEO Johan Molin was considering stepping down next year after more than a decade at the helm of the Swedish lockmaker.

Osram Licht declined 3.7 per cent after Siemens sold its remaining 17 per cent stake in the lighting group for 1.2 billion euros, severing links with its former unit.

Europe's bank index fell for a second day, dragged down by a drop in heavyweight Barclays following a downgrade at Exane, which remains cautious on British banks despite a recent tick-up in UK rate expectations.

The sector has been hit this week by worries over political tensions in Spain and news that the ECB will ask banks to set aside more cash to cover newly classified bad loans.

Mid-tier Italian lender Creval fell 10 per cent with traders citing a downgrade by an Italian broker which said it could not rule out the bank may need a cash call to fund further loan loss provisions following the ECB decision.

Utilities were led higher by French power company EDF , which gained 4.2 per cent, underpinned by an upgrade to buy from hold at Jefferies.

Telecom Italia rose 2.8 per cent after its chairman said he had no “preconception” about any possible spin off of the phone group's fixed line network.

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