European shares closed lower yesterday, with British lenders the biggest fallers on concerns Britain was still mulling a windfall tax on bankers' bonuses.

The pan-European FTSEurofirst 300 index of top shares closed down 0.5 per cent at 1,020.61 points.

The index is up 58 per cent since it reached a record low in early March and is up nearly 23 for the year.

"I sort of feel we have had the first phase of the bull market, the next phase is going to be a bit of a struggle," said Mike Lenhoff, strategist at Brewin Dolphin.

Across Europe, the FTSE 100 index was down 0.2 per cent, Germany's DAX fell 0.6 per cent and France's CAC 40 was 0.2 per cent lower.

"The markets are going to be preoccupied now on when the central banks are going to change their message on interest rates. It will have a dampening influence on how much progress these equity markets can make and how sustainable it is."

There has been growing concern that interest rates could rise sooner than had been anticipated, following last week's surprisingly optimistic US jobs report.

Banks featured among the worst performers. HSBC, Barclays, Lloyds Banking Group and Credit Suisse were down 1.5 to 4.1 per cent.

A UK government source told Reuters on Friday a windfall tax on banks was one revenue-raising option being considered by finance minister Alistair Darling for his pre-budget report tomorrow.

General industrial stocks were under pressure. Siemens lost 1.6 per cent after Morgan Stanley downgraded the stock to "equal-weight" from "overweight".

Shares in Bayer were down 1.4 per cent after it ruled out delivering data to US regulator FDA on its anti blood-clotting pill Xarelto this year and postponed publishing more details until 2010.

On the upside, BASF was up 1.5 per cent after its CEO, Juergen Hambrecht, in an interview said the company would earn more than it expected in the fourth quarter due to an increase in orders.

Daimler gained 1.3 per cent after it said it expects fourth-quarter sales volume at its Mercedes-Benz passenger car division to rise considerably in the fourth quarter.

"Stocks are looking fairly valued, though there's still some of the stimulus down the track. You could argue both ways," said Andy Lynch, fund manager at Schroders.

However, he added that volumes were low, "and it's very difficult to read anything into the movements