London's FTSE 100 index of leading shares shed 0.63 percent to 6,654.34 points, while in Frankfurt the DAX 30 index fell 0.56 percent to 8,305.32 points and in Paris the CAC 40 slid 0.26 percent to 3,956.79 points.

The Madrid market dropped 0.95 percent and Milan shed 0.65 percent.

After the drama of Thursday's sell-off, trading was much calmer as investors weighed up whether the fall was the first phase of a much deeper correction still to come, said Matt Basi, head of UK sales trading at CMC Markets.

"Much stronger than expected measures on the German IFO business survey weren't enough to inspire a return to 'buy the dip mode' in Europe this morning as bulls took a more cautious approach, with speculation over an end to the Fed's asset purchase programme back on the agenda," he said in a broker note.

German business confidence rose unexpectedly in May, data showed on Friday, as businesses in Europe's top economy express become more optimistic about the future.

The Ifo economic institute's closely watched business climate index rose to 105.7 points in May from 104.4 points in April. Analysts had been expecting an unchanged reading.

"The firms are clearly more satisfied with their current business situation than in the previous month. The outlook for future business is unchanged and slightly positive," said the think tank's economist Kai Carstensenhe.

On Thursday, most European indices dropped more than 2.0 percent after Tokyo shares plunged owing to weak Chinese data and signs that the US Federal Reserve may soon taper massive stimulus measures.

European equities had pulled back sharply after recent record and multi-year highs on the back of improving world economic data despite ongoing eurozone strains and some still weak numbers out of the United States and China.

Tokyo's main index ended down more than seven percent on Thursday as investors took profits also after strong recent gains. It recovered slightly on Friday, closing up 0.89 percent.

The Tokyo market has gained in recent weeks from a weakening yen, which lifts demand for Japanese goods abroad, boosting the profits of exporting companies.

In Friday deals, the dollar slid to 100.98 yen from 101.82 yen late in New York on Thursday.

The euro meanwhile slipped to $1.2917 from $1.2935 on Thursday, when markets responded to talk from Federal Reserve chief Ben Bernanke that the US central bank could scale back stimulus measures.

"The euro has remained relatively stable against the US dollar over the past week, deriving support from tentative signs that the pace of economic recession in the eurozone is easing," said Lee Hardman, currency analyst at The Bank of Tokyo-Mitsubishi UFJ in London.

On the London Bullion Market, the price of gold dropped to $1,390.25 an ounce from $1,408.50 on Thursday.

US stocks fell despite a rebound in US durable goods orders in April.

In midday trading, the Dow Jones Industrial Average was down 0.19 percent to 15,264.83 points, while the broad-based S&P 500 lost 0.32 percent to 1,645.19 and the tech-rich Nasdaq Composite fell 0.34 percent at 3,459.42.

Basi said the unexpected rise in US durable goods orders hurt share prices as it added "weight to the argument for a reduction in monetary stimulus from the Fed."

Friday's retreat in stock prices "is an example of the arm-wrestle that is likely to play out in the markets over the next few months as both sides of the stimulus debate make their case."

London's benchmark FTSE 100 index fell 0.60 percent to stand at 6,6656.51 points in afternoon deals, Frankfurt's DAX 30 shed 0.76 percent to 8,288.78 points and in Paris the CAC 40 slipped 0.07 percent to 3,964.52.

The Madrid market dropped 1.30 percent and Milan shed 0.70 percent.

"After the drama of yesterday's sell-off markets have started on a much quieter note this morning, ticking sideways as traders weigh up whether the move represents the first phase of a much deeper correction still to come," said Matt Basi, head of UK sales trading at CMC Markets.

European markets drifted further down towards the open of trading on Wall Street, however.

"Much stronger than expected measures on the German Ifo business survey weren't enough to inspire a return to" buying on dips in the market, he added.

German business confidence rose unexpectedly in May, data showed on Friday, as businesses in Europe's top economy express become more optimistic about the future.

The Ifo economic institute's closely watched business climate index rose to 105.7 points in May from 104.4 points in April. Analysts had been expecting an unchanged reading this month.

"The Ifo business climate index has risen again after two consecutive declines," said the think tank's economist Kai Carstensen.

"The firms are clearly more satisfied with their current business situation than in the previous month. The outlook for future business is unchanged and slightly positive," he said.

European stock markets had slumped on Thursday, with most indices dropping more than 2.0 percent after Tokyo shares plunged owing to weak Chinese data and signs that the US Federal Reserve may soon taper massive stimulus measures, analysts said.

European equities had pulled back sharply after recent record and multi-year highs for some indices on the back of improving world economic data despite ongoing eurozone strains and some still weak numbers out of the United States and China.

Tokyo's main index ended down more than seven percent on Thursday as investors took profits also after strong recent gains. It recovered slightly on Friday, closing up 0.89 percent.

The Tokyo market has gained in recent weeks from a weakening yen, which lifts demand for Japanese goods abroad, boosting the profits of exporting companies.

In Friday deals, the dollar slid to 101.39 yen from 101.82 yen late in New York on Thursday.

The euro meanwhile slipped to $1.2927 from $1.2935 on Thursday, when markets responded to Federal Reserve chief Ben Bernanke, who a day earlier told Congress that the US central bank could scale back stimulus measures soon if economic conditions improved.

"The euro has remained relatively stable against the US dollar over the past week, deriving support from tentative signs that the pace of economic recession in the eurozone is easing," said Lee Hardman, currency analyst at The Bank of Tokyo-Mitsubishi UFJ in London.

Elsewhere Friday, on the London Bullion Market, the price of gold dropped to $1,380.50 an ounce from $1,408.50 on Thursday.

US stocks fell in opening trade Friday as caution continued to reign.

Five minutes into trading, the Dow Jones Industrial Average was down 0.25 percent to 15,256.03 points, while the broad-based S&P 500 lost 0.49 percent to 1,642.35 and the tech-rich Nasdaq Composite fell 0.49 percent at 3,442.34.

Stocks slipped despite a rebound in US durable goods orders in April, which gained 3.3 percent led by aircraft orders after March's 5.9 percent drop.

"Uncertainty regarding the timing of when the Federal Reserve will taper its asset purchases and festering uneasiness toward Chinese economic growth continue to stymie stocks," said Charles Schwab.

London's benchmark FTSE 100 index rose 0.23 percent to 6,712.15 points, Frankfurt's DAX 30 gained 0.46 percent to 8,390.16 points and in Paris the CAC 40 climbed 0.36 percent to 3,981.27.

European stock markets had slumped on Thursday, with most indices dropping more than 2.0 percent after Tokyo shares plunged owing to weak Chinese data and signs that the US Federal Reserve may soon taper massive stimulus measures, analysts said.

London's FTSE 100 index of leading shares fell 2.10 percent to 6,696.79 points, while in Frankfurt the DAX 30 index also dropped 2.10 percent to 8,351.98 points.

In Paris the CAC 40 shed 2.07 percent to 3,967.15 points, while Milan plunged 3.06 percent and Madrid slid 1.40 percent.

European equities pulled back sharply after recent record and multi-year highs for some indices on the back of improving world economic data despite ongoing eurozone strains and some still weak numbers out of the United States and China.

Tokyo's main index ended down more than seven percent on Thursday as investors took profits also after strong recent gains.

Other Asian indices slumped, with markets taking their lead from Wall Street, where stocks fell overnight after Federal Reserve chief Ben Bernanke had told Congress on Wednesday that the US central bank could scale back stimulus measures soon if economic conditions improved.

While US stocks also opened sharply lower Thursday, they had recovered much of the ground by midday, with the Dow showing a loss of just 0.03 percent to 15,303.33.

The S&P 500 was off 0.34 percent to 1,649.75 points, while the Nasdaq slipped 0.19 percent to 3,456.62.

"Fed chairman Ben Bernanke's much anticipated testimony...certainly initiated the volatility" on stock markets, said Spreadex trader Max Cohen.

He added that while share prices initially rose after Bernanke spoke of a need to be cautious when winding down stimulus, sentiment changed when the Fed chief suggested that the US central bank's massive bond purchases could be scaled back in the next few policy meetings.

"To heap further bad news on the markets, China's manufacturing output unexpectedly contracted resulting in the yen strengthening," Cohen said.

The Tokyo market has gained in recent weeks from a weakening yen, which lifts demand for Japanese goods abroad, boosting the profits of exporting companies.

Meanwhile the slump in global share prices came also after HSBC bank said that manufacturing activity in China contracted in May for the first time for seven months in another sign of the weakness of the recovery.

-- Reaction to Bernanke's testimony --

In foreign exchange activity, the European single currency climbed to $1.2915 from $1.2855 on Wednesday. The dollar slid to 101.66 yen from 103.10 yen.

The euro was higher despite news of a downturn in eurozone private sector business activity.

The Markit Eurozone Composite Purchasing Managers Index registered 47.7 points in May, a three-month high and well up on April's 46.9 points albeit still below the threshold of 50 points indicating growth or recession.

On the London Bullion Market, the price of gold dropped to $1,380.50 an ounce from $1,408.50 late in New York on Wednesday.

"The main focus is all about the reaction in the financial markets to Ben Bernanke's testimony," said Neil MacKinnon at VTB Capital financial group.

"In my view it says more about an equity market that is 'overheated' and due a correction rather than any suggestion from the Fed that monetary stimulus is about to be withdrawn," he wrote in a note to clients.

"To believe that the Fed is imminently about to tighten policy would be a mistaken assessment. Why do that when the US economy is in a soft patch and when CPI inflation is falling below target?" MacKinnon added.

Julian Jessop at Capital Economics said the sell off "backs our view that the rally had become overly dependent on expectations of further support from monetary policy."

David White at Spreadex said "the heavy selling seen last night and this morning had participants running for the exits, banking solid returns from the past six months as they go."

London's benchmark FTSE 100 index sank 1.82 percent to stand at 6,715.83 points in midday deals, Frankfurt's DAX 30 slumped 2.36 percent to 8,329.66 points and in Paris the CAC 40 shed 2.18 percent to 3,962.61.

The Madrid market gave up 1.60 percent, Milan slid 2.44 percent and Stockholm dived 2.66 percent.

European equities were pulling back sharply after recent record and multi-year highs for some indices on the back of improving world economic data despite ongoing eurozone strains and some still weak numbers out of the United States and China.

Tokyo's main index ended down more than seven percent on Thursday as investors took profits also after strong recent gains.

Other Asian indices slumped, with markets taking their lead from Wall Street, where stocks fell overnight after Federal Reserve chief Ben Bernanke told Congress on Wednesday that the US central bank could scale back stimulus measures soon if economic conditions improved.

"Fed chairman Ben Bernanke's much anticipated testimony...certainly initiated the volatility" on stock markets, said Spreadex trader Max Cohen.

He added that while share prices initially rose after Bernanke spoke of a need to be cautious when winding down stimulus, sentiment changed when the Fed chief suggested that the US central bank's massive bond purchases could be scaled back in the next few policy meetings.

"To heap further bad news on the markets, China's manufacturing output unexpectedly contracted resulting in the yen strengthening," Cohen said.

The Tokyo market has gained in recent weeks from a weakening yen, which lifts demand for Japanese goods abroad, boosting the profits of exporting companies.

In foreign exchange activity, the European single currency climbed to $1.2886 from $1.2855 on Wednesday. The dollar slid to 101.60 yen from 103.10 yen.

The euro was higher despite news of a downturn in eurozone private sector business activity.

-- Reaction to Bernanke's testimony --

The Markit Eurozone Composite Purchasing Managers Index registered 47.7 points in May, a three-month high and well up on April's 46.9 points albeit still below the threshold of 50 points indicating growth or recession.

On the London Bullion Market, the price of gold dropped to $1,392.60 an ounce from $1,408.50 late in New York on Wednesday.

Meanwhile the slump in global share prices came also after HSBC bank said that manufacturing activity in China contracted in May for the first time for seven months in another sign of the weakness of the recovery.

Wall Street had ended lower on Wednesday following a choppy day of trading as the market weighed exit signals on the Federal Reserve's exceptionally loose monetary policy.

The Dow Jones Industrial Average dropped 0.52 percent, the broad-based S&P 500 gave up 0.83 percent and the tech-rich Nasdaq Composite Index sank 38.82 1.11 percent.

"The main focus is all about the reaction in the financial markets to Ben Bernanke's testimony," said Neil MacKinnon at VTB Capital financial group.

"In my view it says more about an equity market that is 'overheated' and due a correction rather than any suggestion from the Fed that monetary stimulus is about to be withdrawn," he wrote in a note to clients.

"To believe that the Fed is imminently about to tighten policy would be a mistaken assessment. Why do that when the US economy is in a soft patch and when CPI inflation is falling below target?" MacKinnon added.

Frankfurt's DAX 30 inched down 0.05 percent to 8,467.56 points and in Paris the CAC 40 dipped 0.02 percent to 4,035.43.

The FTSE 100 index ended up 48.24 points, or 0.7 percent, at 6,803.87, its highest finish since its record close of 6,950.60 in late 1999.

"There is nothing to suggest that we can't keep going higher. We have broken through previous highs and it can be sustained if we see economic recovery and earnings upgrades come through," Neil Shah, director at Edison Investment, said.

Recent UK data has suggested the economy may be picking up and further upbeat data from Britain and other major economies would help support equity valuations, which have re-rated to post credit crisis highs of around 12.8 times 12-month forward price-to-earnings.

Shah said stocks becoming too expensive or central banks reversing stimulus policies on concerns over asset bubbles were the only potential stumbling blocks in the way of the current rally.

Corporate updates on Tuesday fuelled further optimism in the market.

Outsourcing company Capita climbed 5.9 percent after winning a 1.2 billion pound ($1.8 billion) contract with Telefonica's UK O2 mobile phone business.

British luxury group Burberry rose 5.3 percent after announcing a better-than-expected 14 percent rise in profit.

British retailer Marks & Spencer also jumped, by 6.2 percent, as investors put their faith in a turnaround after the firm posted a profit that was its lowest since 2009 but just above consensus forecasts.

It was not all rosy. Cruise operator Carnival fell 5.5 percent after slashing its full-year earnings outlook for the second time in less than three months.

Miners, down 12.4 percent in 2013 before today on earnings and pricing concerns, were the top performing sector as Societe Generale's commodities team said the sell-off in base metals prices had been overdone and Chinese restocking would feed a rally.

Technical analysts said the recent bounce on the FTSE 100 from the 6,710 zone suggests the rally still has legs and with the highs of 2007 now tested and exceeded, there is little major resistance until the all-time high.

Still, recent gains have forced many investors betting on a retreat in the market to close out positions and David Lewis, head of EMEA stock lending at Sungard's Astec Analytics, said the market remained cautious.

"The value of stock on loan has fallen by a fifth in the last month," he said. "However, though many traders have closed out short positions, short interest remains 40 percent higher than the average of the last 12 months, suggesting that a lot of people are betting on a correction."

Eyes were also on Fed chairman Ben Bernanke's testimony to Congress on Wednesday on the US economic outlook.

"Global equity markets have held their levels this morning, as the growing appetite for risk assets continues despite the generally weak macro environment," said analyst Matt Basi at traders CMC Markets.

London's benchmark FTSE 100 index finished up 0.71 percent to end at 6,803.87 points, soaring past the 13-year closing high point reached a day earlier.

Frankfurt's DAX 30 ended up 0.19 percent to 8,472.20 points and in Paris the CAC 40 index climbed 0.33 percent to close at 4,036.18. It had risen above 4,000 points last Friday for the first time since July 2011.

"With the FTSE 100 happily sitting at its highest level since 2000, there will be some who are wondering whether this rally has got ahead of economic fundamentals," said sales trader Yusuf Heusen at traders IG.

"Perhaps global growth does not merit markets at these highs, but liquidity-boosting actions from central banks take precedence."

Stimulus drives by central banks -- including major quantitative easing (QE) policies by the Bank of England, the US Federal Reserve and the Bank of Japan -- have boosted sentiment and driven investors into equities.

On Wall Street, stocks received a boost after a positive earnings report by Dow member The Home Depot with the Dow Jones Industrial Average adding 0.23 percent, the tech-rich Nasdaq Composite Index rising 0.07 percent and the broad-market S&P 500 increasing 0.10 percent.

In foreign exchange activity, the dollar rose to 102.42 yen from 102.26 yen on Monday. It had jumped as high as 103.31 yen on Friday, touching a level last seen in October 2008.

The European single currency rose to $1.2908 from $1.2884 late in New York on Monday.

Sterling fell against other currencies as a drop in British annual inflation stoked the prospect of more QE from the Bank of England, dealers said.

On the London Bullion Market, the price of gold finished at $1,360.75 an ounce from $1,354.75 late on Monday.

In company news, British investors meanwhile digested a raft of company results.

The price of shares in mobile phone giant Vodafone ended up 1.16 percent to 199.90 pence despite news that annual net profit plunged 90 percent to £673 million ($1.03 billion, 796 million euros) on the back of vast writedowns in Italy and Spain.

Shares in high street retailer Marks & Spencer finished 6.22 percent higher at 467.90 pence, as investors shrugged off a nine-percent drop in annual net profits.

And Burberry stock closed up 5.33 percent to reach 1,541 pence after the luxury clothing and accessories maker announced that adjusted pre-tax profits before exceptional items climbed 14 percent to £428 million, boosted by strong sales in China.

Asian shares also traded mixed after a dip on Wall Street, ahead of testimony from the US Federal Reserve chief and a policy meeting of the Bank of Japan.

"Global equity markets have held their levels this morning, as the growing appetite for risk assets continues despite the generally weak macro environment," said analyst Matt Basi at traders CMC Markets.

London's benchmark FTSE 100 index added 0.12 percent to 6,763.54 points in midday deals, one day after striking a 13-year closing high point.

Frankfurt's DAX 30 fell 0.25 percent to 8,434.58 points and in Paris the CAC 40 index reversed 0.39 percent to 4,006.92. It had passed through 4,000 points last Friday for the first time since July 2011.

"With the FTSE 100 happily sitting at its highest level since 2000, there will be some who are wondering whether this rally has got ahead of economic fundamentals," said sales trader Yusuf Heusen at traders IG.

"Perhaps global growth does not merit markets at these highs, but liquidity-boosting actions from central banks take precedence."

Stimulus drives by central banks including major quantitative easing (QE) policies by the Bank of England, the US Federal Reserve and the Bank of Japan have boosted sentiment and driven investors into equities.

In Asia, Tokyo stocks rose 0.13 percent and Shanghai climbed 0.22 percent, while Hong Kong fell 0.54 percent and Sydney slid 0.56 percent.

The dollar meanwhile turned higher against the yen as investors waited for Fed chairman Ben Bernanke's testimony on the US economic outlook to Congress on Wednesday.

In foreign exchange activity, the dollar rose to 102.72 yen from 102.26 yen on Monday. It had jumped as high as 103.31 yen on Friday, touching a level last seen in October 2008.

The European single currency dropped to $1.2875 from $1.2884 late in New York on Monday.

Sterling fell against other currencies as a drop in British annual inflation stoked the prospect of more QE from the Bank of England, dealers said.

On the London Bullion Market, the price of gold advanced to $1,379.55 an ounce from $1,354.75 late on Monday.

British investors meanwhile digested a raft of company results.

The price of shares in mobile phone giant Vodafone edged up 0.18 percent to 197.95 pence despite news that annual net profit plunged 90 percent to £673 million ($1.03 billion, 796 million euros) on the back of vast writedowns in Italy and Spain.

Shares in high street retailer Marks & Spencer gained 5.56 percent to 465 pence, as investors shrugged off a nine-percent drop in annual net profits.

And Burberry stock jumped 1.37 percent to 1,482 pence after the luxury clothing and accessories maker announced that adjusted pre-tax profits before exceptional items climbed 14 percent to £428 million, boosted by strong sales in China.

Shares in the Sarajevo-based company, the largest of the three telecoms companies in Bosnia, were up 0.28 percent on Tuesday at 17.85 marka.