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January 01 2013, 01:58AM

European stock markets diverged on the last trading day of the year, amid fading hopes of a deal to avert the US "fiscal cliff" of sharp tax hikes and spending cuts.

The London and Paris markets operated for only half a day, resulting in thin trading volumes, while the Frankfurt DAX 30 closed for the year on Friday, with Germany's main index gaining 29 per cent in value during 2012.

Frankfurt soared over the course of 2012 after staging a sustained rally late in the year on eurozone debt progress and fresh stimulus moves by the US Federal Reserve, analysts said.

On Monday, London's benchmark FTSE 100 closed with a daily loss of 0.47 per cent at 5,897.81 points, having risen by 5.84 per cent over the entire year.

The Paris CAC 40 gained 0.58 per cent on Monday to 3,641.07 points, close to its highest point for the year after adding 15.23 per cent in 2012.

Madrid however has lost 4.66 per cent since January, to 8,167.5 points, while Milan has climbed by 7.84 per cent to 16,273.38 points, as Spain and Italy battle with national debt strains.

"Despite signs of economic strength in China ... the mood in the markets is rather subdued - all because of the 'fiscal cliff' impasse across the Pond," said Gekko Global Markets trader Anita Paluch, explaining Monday's trading performance.

In foreign exchange deals, the euro fell to $US1.3194 from $US1.3217 late in New York on Friday. Gold prices rose to $US1,666.80 an ounce on the London Bullion Market from $US1,657.50 Friday.

The single currency has risen by about 2.0 per cent in value against the dollar in 2012.

"Given that this time last year, markets were factoring in a euro bust-up and Greek exiting from the eurozone club by end of 2012, the year actually has seen equities and the euro put on a respectable show," Ishaq Siddiqi, market strategist at ETX Capital trading group, told AFP.

"European corporates aren't doing too bad either - cash-rich in many cases as they hoarded money during the worst of the crisis. This means they will have to put that money to work in 2013, whether it's through share buybacks, mergers and acquisitions or increasing dividends.

"At the same time, valuations are cheap and the increase in risk appetite this year has been favourable for cyclical stocks like banks, miners, autos and industrials. So looking to 2013, we should see a sense of normality return to markets, as 2012 was still a bit of a rollercoaster," Siddiqi added.

But German Chancellor Angela Merkel warned that her country's economy, the continent's biggest, would experience a harder time next year than in 2012 and cautioned too that the eurozone debt crisis was far from over.

In her annual New Year address, Merkel said: "In fact, the economic environment next year will not be easier, but more difficult."

"The crisis is a long way from being beaten."

Although top exporter Germany has managed to hold up to the crisis fairly well, growth has slowed there as well since the beginning of the year.

In Asia meanwhile, stock markets fell in New Year's Eve-shortened trade. However, there was some bright news out of China, where a survey by HSBC showed manufacturing activity hit a 19-month high in December.

And despite Monday's losses, all the region's stock markets ended the year higher, with Bangkok the standout performer, surging almost 36 per cent, while Shanghai was the weakest, adding less than three per cent over the 12 months.