Spain's IBEX <.IBEX> fell 1.2 percent after voters backed separatist parties in a rebuke to Prime Minister Manuel Rajoy and European Union leaders. The IBEX, however, ended above its morning lows.
"This is Groundhog Day, we have been here," said Christopher Peel, chief investment officer at Tavistock Wealth. "I just don't think the Spanish government can do anything other than come to the table now."
Thin liquidity due to the holidays could be accentuating a kneejerk reaction on the IBEX, Peel added. "Likely there's some hedge funds leaning on it, but in terms of long-only money, I don't think there will be much movement now," he said.
Banco Sabadell (>> Banco de Sabadell) and Caixabank (>> CaixaBank), which have the biggest exposure to Catalonia and moved headquarters after October's independence referendum, both fell more than 3 percent, leading losers. Santander (>> Banco Santander), Bankia (>> Bankia SA), and BBVA (>> Banco Bilbao Vizcaya Argentaria) also dropped.
Stocks across sectors exposed to Spain's economy were hit, including telecoms firm Telefonica (>> Telefonica), real estate investment trust Merlin Properties (>> Merlin Properties) and airport operator AENA (>> Aena).
"The environment remains difficult for Catalonia's economy and investments," said Carsten Hesse, economist at Berenberg.
As political risk reared its head again, financial stocks were the biggest drag on European markets. The euro zone banks index <.SX7E> fell 1 percent.
Spanish stocks dominated fallers on the euro zone STOXX index <.STOXXE>, which dipped just 0.1 percent, confirming analyst expectations that any shake-out from the Catalonia vote would be mostly confined to Spain.
Germany's DAX <.GDAXI> edged down 0.3 percent and France's CAC 40 <.FCHI> dipped 0.4 percent.
"You always have to keep political risk in mind but it's the underlying fundamentals that are driving European equities," said Peel.
"The euro zone and Spanish economies are recovering, interest rates are going to stay low, and most investors are only looking at those fundamentals."
Spanish stocks were Europe's best-performing benchmark for much of the year, but political risk has held them back from the broader market's recent rally. The IBEX is 9 percent down from its May peak.
Among the risers on Friday, French telecoms firm Eutelsat Communications (>> Eutelsat Communications) jumped 4.4 percent after Kepler Cheuvreux raised its rating on the stock to 'buy' from 'hold'.
Germany-listed shares in South African retailer Steinhoff <SNHG.DE> fell 1 percent. The stock had earlier gained after the company, mired in an accounting scandal, said a court decision on whether to allow an investigation into its accounts is expected by Jan. 22.
(Reporting by Helen Reid and Danilo Masoni; Editing by Alison Williams)
By Helen Reid