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LONDON, Dec 28 AFP

December 29 2012, 04:35AM

European stock markets have dropped and the euro has fallen versus the dollar, the final trading day of the year for the Frankfurt index.

Equities were downbeat on Friday in the absence of a deal to avert the US "fiscal cliff" of sharp tax hikes and spending cuts.

London's FTSE 100 index of top companies ended the week with a loss of 0.49 per cent at 5,925.37 points and Frankfurt's DAX 30 fell 0.57 per cent to 7,612.39 points, though it ended the year with an overall gain of more than 29 per cent.

In Paris, the CAC 40 dropped by 1.47 per cent to 3,620.25 points, in part on profit-taking after earlier reaching its highest level for the year.

The markets in London and Paris will hold half sessions on Monday.

In Milan the FTSE Mib index was down by 0.82 per cent at 16,273 points, and in Madrid the Ibex 35 shed 1.81 per cent to 8,131 points.

On Wall Street, US stocks slumped in midday trades as well, with the Dow Jones Industrial Average down by 0.5 per cent, the broader S&P 500 off by 0.48 per cent and the tech-rich Nasdaq Composite dipping 0.3 per cent.

Markets fear that if US President Barack Obama and Republican politicians do not reach a compromise before a budget deadline arrives on January 1, the world's biggest economy might head back into recession.

"Hopes for a budget agreement prior to January 1 are fading," said Briefing.com's Dick Green. "Uncertainty remains very high and time very short."

Back in France, the national statistics agency INSEE on Friday revised its figure for the country's third-quarter economic growth down from 0.2 per cent to 0.1 per cent, making the government's full-year target harder to reach.

In foreign exchange deals, the euro fell to $US1.3211 from $US1.3235 late in New York on Thursday. Gold prices rose to $US1,657.50 an ounce on the London Bullion Market from $US1,655.50 late on Thursday.

US politicians have until Tuesday to come up with a deficit-cutting budget that is less painful than the steep tax hikes and swingeing spending cuts that would otherwise take effect.

Republicans and Democrats are blaming each other for the lack of progress on a deal, with Senate Majority Leader Harry Reid saying: "I have to be very honest, I don't know time-wise how it can happen now."

Obama cut short his Christmas holiday to Hawaii to host top congressional leaders on Friday in a last-ditch bid to find an agreement.

In Asia, Tokyo's main index on Friday closed at its highest point since last year's quake-tsunami, ending 2012 up almost 23 per cent year-on-year as Japan's new government pledges to turn around the long-suffering economy.

Elsewhere on Friday, Italian borrowing rates rose slightly in a five- to ten-year debt auction, as the government raised close to six billion euros ($A7.65 billion) in its last bond sale of 2012.

The Treasury raised 2.87 billion euros in five-year bonds, at a rate of 3.26 per cent compared with 3.23 per cent at the last comparable operation in November, and three billion euros in 10-year bonds at 4.48 per cent, up from 4.45 per cent, the Bank of Italy said.