The pan-European STOXX 600 index gave up gains of as much as 0.8% after data showed U.S. jobless claims rose for the first time in nearly four months, suggesting the labor market was stalling amid a surge in COVID-19 cases.

In Europe, consumer confidence deteriorated in July despite expectations of an improvement.

"The big question is: how much pent-up demand will be seen in the months ahead? Sales figures (in Europe) have so far been encouraging, but the July confidence figures cast some doubts over the spending outlook," said Bert Colijn, senior economist, eurozone, at ING.

There were similar doubts about U.S. consumer spending as the additional amount received by the unemployed under an emergency stimulus program is set to taper over the weekend.

"We should be braced for a period of worsening economic news," ING's Chief International Economist James Knightley said.

The travel and leisure sector - worst hit by pandemic containment measures - fell 1.1%. It has lost more than 36% this year with a recovery from March lows plateauing.

Losses in the main index were capped by a 2.1% surge in automakers after Germany's Daimler AG forecast a rise in operating profit at its Mercedes-Benz cars and vans division in 2020 as sales rebound.

Unilever climbed 7.9% as its second-quarter sales fell far less than feared. Shares in Nestle and Danone rose about 1.5% each..

Publicis Groupe SA, the world's third-biggest advertising company, surged 8% after it beat market expectations for quarterly underlying sales.

Companies listed on the STOXX 600 are expected to report a 58.6% drop in second-quarter earnings, but many investors believe there is a big margin for error, given analysts in many cases had no precise outlook to factor into their estimates.

The STOXX 600 is on track to end with weekly gains as hopes of a COVID-19 vaccine and optimism around a European Union recovery fund pushed the benchmark index to early March highs.

But investors keep a wary eye on U.S-China trade relations as they await Beijing's official response to the forced closure of its consulate in Houston amid accusations of spying.

By Sruthi Shankar and Susan Mathew