Picture used for illustrative purpose. File

European shares fell on Friday as global sentiment soured after Beijing ordered United States to close its consulate in a Chinese city in retaliation to similar action from Washington.

The pan-European STOXX 600 index fell 1.9%, on track for its biggest one-day drop in a month, pushing it to a weekly loss for the first time in four weeks.

"There could be more impact on equities, think technology companies ... especially if the White House stops giving U.S. corporates a free pass in their dealings with China," said Stephen Innes, chief global markets strategist at AxiCorp.

While all sectors traded in the red, technology stocks such as SAP SE and ASML Holding NV led losses following a sell-off in U.S. peers overnight, while the China-sensitive basic materials sector lost 2.3%.

"What ultimately matters for growth assets is whether a geopolitical escalation morphs into economic beatdowns," Innes added.

A 750-billion euro EU recovery fund and hopes of an eventual COVID-19 vaccine had put European stocks on course to end the week higher, until a US order to shut the Chinese consulate in Houston over accusations of spying drew ire from Beijing.

Meanwhile, PMI data showed Germany's manufacturing sector avoided contraction for the first time in 19 months in July with a notable upturn in sales abroad. Euro zone data showed business activity in the bloc had returned to growth. 

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This came as a welcome relief after data on Thursday showed euro zone consumer confidence unexpectedly fell in July.

Still, Germany's DAX slumped 2% as tech stocks weighed. London blue-chips hit two-week lows, with investors looking past data that showed UK retail sales jumped back in June to almost pre-coronavirus lockdown levels as non-essential stores in England reopened.

British Gas owner Centrica surged 21.5% to top the STOXX 600, despite posting lower first-half earnings as it announced plans to sell its North American business Direct Energy to NRG Energy for $3.63 billion.

In earnings, German chemicals distributor Brenntag AG jumped 2.1% after preliminary results showed core earnings beat estimates, while plumbing supplier

Ferguson rose after a fall in sales at it main U.S. operations recovered in the May to July period.

The world's biggest lighting maker, Signify NV jumped 5.2% after a 62% jump in second-quarter net profit.