(Reuters) - European shares fell on Friday and posted their biggest weekly decline in nearly three years on worries about weak global growth and fears that the euro zone debt crisis could engulf Italy and Spain.
A bigger-than-expected rise in U.S. payrolls helped to limit losses.
The FTSEurofirst 300 .FTEU3 index of top European shares fell 1.8 percent to 975.02 points, the lowest close in 13 months. Volume was more than twice the average of the last 90 days.
Over the week, the index fell 9.8 percent, the biggest weekly fall since October 2008.
European shares measured by the MSCI Europe index .MSCIEU lost about $820 billion of their valuation this week.
"People are as much worried about the way things are being handled as anything else. The authorities don't seem to have a strategy for Italy and Spain. They're just buying (bonds) in Ireland and Portugal," said Colin McLean, managing director at SVM Asset Management in Edinburgh.
Royal Bank of Scotland (RBS.L), majority-owned by the state, illustrated the toll the euro zone crisis is taking on the sector. Its shares fell 6.9 percent on Friday after it reported a pretax loss of $1.1 billion in the second quarter, bruised by writedowns on Greek government bonds and Irish customers struggling to repay loans.
Lloyds Banking Group (LLOY.L), which reported a loss on Thursday, fell 6.1 percent. RBS and Lloyds fell 21 and 24 percent respectively over the week.
However, resource stocks were the biggest fallers, on the demand outlook following recent weak economic data. The STOXX Europe 600 Oil & Gas Index .SXEP fell 3.3 percent. Royal Dutch (RDSa.L) fell 3.9 percent, taking its loss for the week to 13.9 percent, hit by issues in Nigeria.
U.S. job growth accelerated more than expected in July as private employers stepped up hiring, easing fears the economy was sliding into a fresh recession.
This helped the index turn positive briefly, recovering from a low of early in the session.
"There were big selling programmes - it looks as though hedge funds were liquidating," McLean said about early trading in the market. "There was an unwillingness to quote sensible prices in some stocks."
However, the index went back toward the lows, with the employment figures not enough to convince investors that growth was picking up, following recent weak U.S. data on GDP, manufacturing and consumer spending.
"The non-farm payrolls were good. It feels like the market is not moving on real information and investors are taking a risk-adverse mentality on the uncertainty the politicians have been creating," said Jane Coffey, who manages 340 million pounds in assets for Royal London Asset Management.
Across Europe, Britain's FTSE 100 .FTSE and Germany's DAX .GDAXI fell 2.7 and 2.8 percent respectively. France's CAC40 .FCHI fell 1.3 percent.
The Thomson Reuters Peripheral Eurozone Countries Index .TRXFLDPIPU outperformed, down just 0.2 percent. The Thomson Reuters Peripheral Eurozone Banking Index .TRXFLDPIPUBANK was up 1.7 percent.
"It is a relief rally in Italian and Spanish banks from being oversold, but we think it is too early to go in," said James Barber, head of European equities at Russell Investment.
"There is a real risk of permanent capital impairment for banks if they have to raise more capital."
On the upside within the banking sector, Intesa Sanpaolo (ISP.MI) rose 6.3 percent after it posted second-quarter net profit ahead of forecasts as trading profit rose, helped by capital gains.
Intesa shares are still down about 35 percent this year, with Italy caught up in the euro zone debt crisis.
France's Natixis (CNAT.PA) rose 11 percent, after profit beat forecasts.
Despite the stock market plunge this week, price-to-earnings ratios on the broad STOXX Europe 600 .STOXX have remained stable, with the index trading at 10.2 times 12-month forward earnings, signaling that analysts have started to slash their profit forecasts for companies, a strong bearish signal.
"We're in a crash configuration triggered by a confidence crisis. This is getting really serious," said Jacques Henry, analyst at Louis Capital Markets in Paris.
"Forget sector rotations within equities, it's sad to say but there is no safe haven here. Even with the big dividend- paying stocks, your investment is not protected."