The FTSEurofirst 300 index of top European shares .FTEU3 was down 1.7 percent at 0745 GMT, with indexes in London .FTSE, Frankfurt .GDAXI and Paris .FCHI all in negative territory. Asian shares were flat after initial gains .MIAPJ0000PUS.

With the dollar strengthening against most major currencies following a strong U.S. industry output report on Wednesday, the euro was down 0.15 percent against the greenback as Europe got into its stride, extending the single currency's nine-day decline.

"An undoing of market expectations on Fed easing has been reflected in higher U.S. yields, but has yet to affect market volatility, which remains at low levels ... The lack of news in the euro area belies tensions there, as key European decisions lie ahead," Barclays Capital analysts wrote in a note.

Europe's stock markets began to rally two weeks ago when ECB President Mario Draghi said the central bank was "ready to do whatever it takes to preserve the euro", raising hopes of bold steps to help lower the borrowing costs of Spain and Italy.

That rising appetite for risk has also been pulling down German government bond prices, which hit a new seven-week low following a further sell-off in U.S. Treasuries.

The euro zone will publish final July inflation numbers later in the day. They are expected to show price rises running at an unchanged 2.4 percent. Other data on the watch list for investors includes UK retail spending figures for July.

Over the coming few weeks markets will be watching the Jackson Hole meeting of central bankers at the end of the month, U.S. jobs data due early in September and the ECB's policy meeting early next month for clues over crisis actions.

(Reporting by Marc Jones; Editing by Will Waterman)

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