By Devik Jain and Amruta Khandekar
(Reuters) -European shares gained on Friday marking an upbeat end to the week, helped by an initial boost after the British government's turnaround on tax cuts, but this faded due to continued uncertainty about its fiscal stance.
The region-wide STOXX 600 index closed up 0.6%, building on Thursday's rally but was still off session highs hit immediately after British Prime Minister Liz Truss announced the scrapping of parts of the government's fiscal programme.
Truss fired her finance minister Kwasi Kwarteng and said Britain would retain plans to increase corporation tax.
Kwarteng, whose announcement of unfunded tax cuts had sparked a rout in bond markets last month, has been replaced by former foreign and health minister Jeremy Hunt.
"It's been a little bit of a relief trade but we still have concerns that we don't know exactly what is happening. We're going to have to keep an eye out on what the new Chancellor says next week," said Daniela Hathorn, market analyst at Capital.com.
"Markets need a bit more clarity on what this fiscal plan currently stands at and they're going to want to know exactly where we can see the funding come from."
The pound fell against the dollar, trading down 1.2%, near the day's lows, while two-year gilt prices, which turned lower before Truss spoke, dropped further in late trade.
London's blue-chip FTSE 100 also came off session highs and ended up 0.1%.
The STOXX 600 has fallen 19.8% so far this year, with markets on edge about aggressive interest rate hikes from central banks tipping the economy into a recession. An energy crisis exacerbated by the Russia-Ukraine conflict has also added to worries about an economic slowdown in Europe.
Meanwhile, big U.S. banks reported a hit to profits on Friday as they braced for a weaker economy.
Still, Friday's gains helped the STOXX index erase some losses suffered in the first three days of the week.
Adding to recent market optimism, Russian President Vladimir Putin said on Friday there was no need for massive new strikes on Ukraine and that Russia was not looking to destroy the country.
Most STOXX 600 sectors were trading higher, led by real estate stocks and utilities.
Among individual stocks, Temenos slumped 19% after the Swiss banking software group slashed its 2022 guidance.
UPM-Kymmene added 5.7% after the Finnish forestry group reported higher Q3 results and said it expected 2022 adjusted EBIT to improve compared with 2021.