Activity was expected to be subdued with U.S. markets closed for the Independence Day holiday, and ahead of meetings of European Central Bank and Bank of England policy makers on Thursday.

The FTSE Eurofirst 300 index .FTEU3 of top European shares fell 0.3 percent to 1,042.57 points, having risen 1 percent on Tuesday to its highest closing level since early May.

European equity markets began their latest rally on Friday, having fallen sharply for much of June, after European Union leaders agreed on new measures to support the region's banks and address funding problems facing Spain.

Investors have also been encouraged back into riskier asset markets by expectations that the ECB will cut rates on Thursday and may also inject fresh funds to help the euro area's struggling economies.

"The depth and length of the economic slowdown in the euro zone appears to be increasing as tightening credit conditions and elevated uncertainty provides strong headwinds to growth on top of ongoing fiscal tightening," said Lee Hardman, currency economist at The Bank of Tokyo-Mitsubishi UFJ.

A Reuters poll of economists showed a majority of economists expect the ECB to cut its main rate to 0.75 percent on Thursday, while money market traders are evenly split on whether the central bank will cut the deposit rate, a separate survey showed.

The Bank of England is also expected to launch a third round of monetary stimulus.

The euro eased slightly to $1.2593, well below Friday's high of $1.2693 but above the previous day's low of $1.256.

GLOBAL SLOWDOWN

Data releases from across the globe continue to add weight to the view that the world economy is slowing down.

An HSBC index of activity among Chinese service sector firms showed them growing at their slowest rate in 10 months in June as new order growth cooled, though the index has posted 43 months of consistent expansion.

A survey showed Germany's services sector unexpectedly stagnated in June, ending an eight-month period of expansion as new order intake dropped.

A composite Purchasing Managers' Index (PMI) for the whole euro area, which surveyed thousands of companies, was revised up in June, but has been below the 50 mark that separates growth from contraction for nine of the last 10 months.

"Even Germany looks to have fallen into a renewed decline, though only a very modest drop in output is signaled. The pace of downturns in other major euro member states is far more worrying," said Chris Williamson, chief economist at data provider Markit.

He said output in Italy probably declined 1 percent in the second quarter, with steep downturns also on the cards in Spain and France.

The prospect of further central bank monetary easing has supported the prices of gold and other commodities this week, though gains in these markets have tapered off.

Expectations of further accommodation from the ECB and an announcement of increased quantitative easing by the BoE on the same day "are all examples of market-friendly events, propping equities and favoring oil relative to gold", said Ashraf Laidi, chief global strategist at City Index.

Spot gold was little changed at $1,616.79 an ounce, after rising more than 4 percent since last Friday. It hit a two-week high of $1,624.70 on Tuesday.

Brent crude, which has traded above $100 a barrel as rising tension over Iran's nuclear program fed worries about supply disruptions, slipped $1.27 to $99.53.

(Additional reporting by Yati Himatsingka. Editing by Will Waterman)

• A Permanent Economic Emergency