FILE PHOTO: The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, August 27, 2025. REUTERS/staff/File Photo

By Medha Singh

(Reuters) -European shares edged lower on Friday as British bank stocks slid, while investors geared up for a slew of euro zone data and a key U.S. inflation report for cues on the potential timing of interest rate cuts on both sides of the Atlantic.

Natwest dropped 4.8%, while Barclays and Lloyds shed 3.5% and 3.8%, respectively, as a think tank recommended Britain's government should tax banks on the billions of pounds they receive in interest from the Bank of England on the reserves they hold at the central bank.

The banks index fell 1.3%, the most among European sectors.

The STOXX 600 index was down 0.4% at 551.46 points, as of 0801 GMT, and headed for its first weekly loss in four. Concerns over a potential collapse of the French government and the U.S. Federal Reserve's independence weighed on the benchmark index this week.

Earlier this week, France's opposition parties said they will bring down the minority government in the September 8 vote, which Prime Minister Francois Bayrou unexpectedly announced on Monday. The vote carries heavy risks for the economy, bringing back fears of recession, business leaders said.

France's CAC 40 has shed 3.1% so far this week, lagging regional benchmark indexes.

Latest data showed French consumer prices rose slightly less than anticipated in August, while German figures and U.S. personal consumption expenditures (PCE) report will take centrestage later in the day.

The inflation releases from several euro area countries could point to downside potential for the underlying inflation momentum, and in turn affect December ECB rate expectations, said Christoph Rieger, head of rates & credit research at Commerzbank.

After delivering eight rate cuts since mid-2024, the European Central Bank kept its deposit rate unchanged in July and signalled a potential pause as it monitors evolving economic risks.

Meanwhile, the PCE data, the Fed's preferred inflation gauge, is expected to have remained unchanged at 0.3% in July, taking its annual rate to 2.9%. Markets broadly expect the U.S. central bank to cut rates next month, following Chair Jerome Powell's dovish remarks last week.

Shares of Remy Cointreau pared early gains to drop 1.8%, even as the French spirits maker raised its full-year 2025/26 profit outlook.

Czech-based firearms maker Colt CZ Group SE dipped after entering a deal to buy chemicals group Synthesia Nitrocellulose in two stages in a transaction valuing the target at 22 billion crowns ($1.05 billion).

($1 = 20.9570 Czech crowns)

(Reporting by Medha Singh in Bengaluru; Editing by Sherry Jacob-Phillips and Eileen Soreng)