European shares set for sharpest annual drop in 3 yrs.

LONDON - European shares were poised to register their biggest annual drop since 2008 on Friday after a year marred by the euro zone debt crisis that has threatened to drag down the global economy.

At 12:00 GMT the FTSEurofirst 300 was up 0.3 percent at 995.40 points in choppy trading with volume as light as 10.9 percent of the 90-day average. The UK and German markets will close early ahead of the New Year holiday weekend.

The European index was on track to record an 11.5 percent loss for the year, with euro zone banks, which own the bulk of troubled Greek, Italian and Spanish debt, losing nearly 40 percent of their value in 2011.

All cyclical sectors fell heavily over the course of the year, with basic resources and automotive stocks down 31 percent and 25 percent respectively. Investors have shunned these sectors as government austerity measures and a lending squeeze in the euro zone could derail a fragile world economic recovery.

"It has been a tough year, particularly for stock-picking managers, and we'll probably see more of the same in the first quarter, with a lot of uncertainty over the euro zone," said James Buckley, who helps manage 1 billion pounds at Baring Asset Management.

Italy, Europe's largest debtor, faces 100 billion euros of bond redemptions and coupon payments by the end of April, which is likely to make investors nervous going into next year.