The S&P/TSX composite index was well off session lows, closing up 10.93 points at 12,237.4, while the TSX Venture Exchange advanced 1.57 points to 1,517.46.
The Canadian dollar was down 0.65 of a cent to 98.13 cents US as European worries pushed investors to the safe haven of U.S. Treasuries.
U.S. markets also erased early losses amid positive employment news a day before the release of the U.S. non-farm payrolls report.
Payroll firm ADP said the American private sector created 325,000 jobs in December. That is much higher than the consensus by economists that the U.S. government report will show the American economy created a total of 140,000 jobs last month.
The Dow Jones industrial average came back from a triple digit loss to slip 2.72 points at 12,415.7, while the Nasdaq rose 21.5 points to 2,669.86. The S&P 500 index edged 3.76 points higher to 1,281.06.
While the report is another indication of an improving U.S. labour market, economists observed that the track record of the ADP reports has been uneven.
"It’s important to keep in mind that this report is notorious for missing the actual payroll number by wide margins on a month-to-month basis," noted BMO Capital Markets senior economist Robert Kavcic.
"The biggest miss on record was (an overestimation of) 210,000 in November 2008, with four misses of 100,000-plus since then."
European worries were front and centre amid concerns that banks will struggle to raise much needed new capital.
Trading in UniCredit SpA, Italy’s largest bank, was suspended for the second day running Thursday after shares tumbled further in the wake of a heavily discounted share offering. UniCredit is trying to raise €7.5 billion to meet new European requirements for banks to shore up capital reserves.
"That speaks volumes to the issues that are there in Europe," said Chris Kuflik, wealth adviser at ScotiaMcLeod in Montreal.
"They have now come to the reality that they have to raise all this money and it’s going to cost them a lot more to raise it because they extended and pretended for so long, stuck their heads in the sand and pretended nothing was really wrong and the problem would go away."
In Spain, the new conservative government said it expects the country’s banks to come up with additional provisions of up to €50 billion, which amounts to four per cent of Spain’s gross domestic product, in extra provisions on bad property assets.
There were also concerns that the debt crisis is testing confidence in even the region’s biggest economies.
France’s borrowing rates rose slightly in a bond auction on Thursday as investor demand eased.
The majority of bonds sold Thursday were 10 years, which markets eye as a benchmark of investor confidence. Demand for them surpassed the supply but was considerably less than at an auction in December. The yield was 3.29 per cent, up from 3.18 per cent last time. In total, €4.02 billion were sold.
European government bond auctions used to be routine affairs.
But investors have been demanding higher yields as markets grow increasingly impatient at the failure of eurozone leaders to come up with a convincing fix for the region's government debt crisis.
Countries that cannot raise money at reasonable rates at such sales must be rescued with bailout packages, and investors have grown concerned in recent months that even countries in the so-called European "core" could join that club.
Fears of growing contagion from the weak European banking sector pushed the TSX financial sector down 0.27 per cent with National Bank (TSX:NA) 45 cents lower at $72.54 and Royal Bank (TSX:RY) falling 61 cents to $52.34.
The February crude contract on the New York Mercantile Exchange declined $1.41 to US$101.81, pushing the energy sector down 0.51 per cent. Prices were also under pressure from data showing that U.S. oil inventories increased by 2.21 million barrels last week. Canadian Natural Resources (TSX:CNQ) moved down 52 cents to C$39.33.
The base metals sector was up 0.84 per cent even as the March copper contract on the Nymex dipped a cent to US$3.43 a pound. Performance was mixed with Teck Resources (TSX:TCK.B) off 30 cents to C$38.49.
But shares in Vancouver miner First Quantum Minerals Ltd. (TSX:FM) jumped 92 cents to $21.98 after it announced that it is selling its mines in Congo and settling legal claims for US$1.25 billion after its operations were nationalized by the government of the central African country. The company said Thursday that it had struck a deal to sell its mines and assets to Eurasian Natural Resources Corp. PLC, including the Kolwezi tailings project, and the Frontier and Lonshi mines and related exploration interests.
The gold sector was also positive as bullion shook off early losses with the February contract in New York closing up $7.40 to US$1,620.10 an ounce. Iamgold Corp. (TSX:IMG) gained 72 cents to C$17.48.
Sentiment took a further beating after a string of U.S. retailers, including Target Corp., Kohl’s Corp., J.C. Penney Co. and The Children’s Place Retail Stores Inc., reduced their earnings outlooks.
Many retailers reported solid sales gains for December. But that higher sales activity was spurred by heavy discounts on goods.
In other corporate news, Magna International Inc. (TSX:MG) has acquired Vogelsitze GmbH, a German manufacturer of seats for the bus and light train industries for an undisclosed price. Magna shares gained 55 cents to $34.57.