Disappointing U.S. jobless claims figures weighed on markets Thursday, unwinding much of the gains made earlier when Spain saw relatively strong demand in a keenly observed bond auction.
The U.S. Labor Department said weekly applications dipped last week by 2,000 to 386,000. But that was only after it revised up the previous week's data to show 8,000 more people applied for benefits than first estimated. The four-week average, a less volatile measure, rose to the highest level in three months.
"Discouraging news on initial jobless claims suggest job growth is slowing," said Jennifer Lee, senior economist at BMO Capital Markets.
Reaction to the figures unwound much of the market gains made earlier in the European trading day, when Spain managed to sell off more debt than it had targeted, although at a higher premium _ upbeat U.S. economic indicators have been one of the main positive drivers to market sentiment this year.
The relative strength in the U.S. data has helped offset ongoing fears over Europe's debt crisis. Over the past few weeks, Spain has become the main epicenter of those concerns.
An auction of its bonds earlier provided some reassurance. Though the yield on the 10-year bond auctioned was 5.7 percent, up from 5.3 percent at the last auction on April 4, demand was more than double the amount sold.
Traders initially focused on the strong demand, which suggests that Spain will continue to be able to tap financial markets to fund itself. That is crucial for the rest of Europe, as Spain would likely be too big to bail out.
But investor confidence in Spain remains shaky and vulnerable to bouts of fear. By late afternoon, Spain's 10-year bond yield on the secondary market had risen back up to 5.86 percent and shares in Madrid underperformed their peers in Europe, shedding 2.4 percent by the close.
Germany's DAX ended 0.9 percent lower at 6,671.22 while France's CAC-40 tumbled 2.1 percent to 3,174.02, hurt also by unconfirmed rumors that the country might see its credit rating downgraded. Britain's FTSE 100 was more resilient, closing flat at 5,744.55.
Wall Street was buoyed somewhat by strong earnings reports. The Dow Jones industrial average was up 0.1 percent to 13,050.91 while the S&P 500 also rose the same rate to 1,387.14.
Morgan Stanley stock rose 4 percent after the bank trounced Wall Street's earnings and revenue estimates. EBay, Southwest Airlines and Bank of America also beat forecasts.
Earlier in Asia, Japan's Nikkei 225 stock average slipped after the country _ which for decades has blanketed the world with its exports _ posted its biggest annual trade deficit ever.
The benchmark index fell 0.8 percent to close at 9,588.38 after the Finance Ministry said the trade deficit for the year was 4.41 trillion yen ($54 billion). With all but one of Japan's 54 nuclear power reactors offline in the aftermath of last year's nuclear disaster, the country has been forced to rely on imported oil and gas to generate electricity.
Hong Kong's Hang Seng rose 1 percent but mainland Chinese shares fell despite growing expectations that China may loosen its monetary policy, possibly as soon as this weekend, to ensure its slowdown isn't too abrupt. The benchmark Shanghai Composite Index lost 0.9 percent to 2,378.63 while the smaller Shenzhen Composite Index lost 0.2 percent to 954.27.
In oil markets, the benchmark contract for May delivery was up 7 cents to $102.74 per barrel in electronic trading on the New York Mercantile Exchange.
In currency trading, the euro was up 0.1 percent at $1.3140 while the dollar rose to 81.56 yen from 81.24 yen late Wednesday in New York.
Pamela Sampson in Bangkok contributed to this report.