The euro zone STOXX index was flat after rallying earlier this week to the highest since early June, mostly on hopes an EU-wide fund to support pandemic-struck economies could lift the bloc out of recession.

German Chancellor Angela Merkel warned "the differences are still very, very big," as she arrived at the summit in Brussels.

Analysts believe markets could tolerate a few days or weeks of delay, with opposition from the Netherlands and the threat of a Hungarian veto weighing on chances of a deal on the EU's 2021-27 budget - envisaged at slightly above 1 trillion euros - and the attached recovery fund.

"(Merkel's) cautious comments suggested EU leaders might not be able to reach a compromise," said Edward Moya, senior market analyst at OANDA, New York. "Negotiations are expected to be tough ... but optimism is high that a breakthrough will be made at the two-day summit."

Meanwhile, the United States shattered its daily record for coronavirus infections on Thursday, raising fears of a slower recovery in the world's largest economy.

The pan-European STOXX 600 index closed up 0.2% as gains in automakers, commodity and technology stocks <.SX8P> of more than 1% outweighed losses in banks <.SX7P>, energy, travel and leisure stocks.

For the week, the index was up 1.6% for its third straight week of gains, as reports of progress in developing a COVID-19 vaccine supported cyclical stocks.

AstraZeneca was the biggest boost on the pan-region index, hitting a two-month high. Russia's wealth fund said it was set to unveil a deal with the British drugmaker to manufacture a COVID-19 vaccine being developed along with Oxford University.

Sweden's main stock index scaled a near five-month high as telecoms equipment maker Ericsson surged 11.4% after smashing core profit expectations. Its shares posted their best one-day percentage gain in more than two years.

Tobacco group Swedish Match AB jumped 10.4% on better-than-expected quarterly profit.

Among auto stocks, Daimler rose 4.4% after posting a smaller-than-expected operating loss in the second quarter, while truck maker Volvo AB rose after beating profit forecasts.

(Reporting by Sruthi Shankar in Bengaluru; Editing by Shounak Dasgupta and Mark Potter)

By Sruthi Shankar and Susan Mathew