LONDON (AFP) - European stock markets stirred Friday (Aug 26) at the end of a tranquil week as Federal Reserve chief Janet Yellen indicated there was a case for raising US interest rates.

Market watchers had been waiting for Yellen to show her hand in an address to an annual gathering of central bankers in Jackson Hole, Wyoming.

Noting strong US job growth, Yellen said gradual increases in the Fed's benchmark rate in the coming years should be expected.

"In light of the continued solid performance of the labour market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months," Yellen said, according to prepared remarks which traders appeared to see as a mix of hawkish and dovish.

Fed watchers had complained this year that US central bankers' public pronouncements had been inscrutable and sometimes contradictory, leaving investors perplexed.

Her remarks raised the likelihood that the Fed will increase the rate from its current ultra-low 0.25-0.50 per cent level by the end of the year, and as early as its next meeting in September.

"Our view is that most officials will want to see more concrete evidence of a rebound in GDP growth and a rise in inflation towards the 2 per cent target, with a December move still appearing the most likely outcome" for a rate rise, Capital Economics ventured.

European stocks advanced marginally as news of her comments emerged with London and Frankfurt rising 0.3 per cent and Paris gaining 0.8 per cent by the close.

But after a small initial rise on Wall Street in the slipstream of Yellen's comments, the Dow Jones Industrial Average drifted, losing 0.4 per cent mid-session, while the tech-heavy Nasdaq and the broad-based S&P 500 indices also reversed early gains.

Prior to Yellen's comments being released Craig Erlam, analyst at Oanda trading group, indicated investors above all wanted "clarity on the near-term path of interest rates."

Thereafter, he added her views "didn't necessarily offer much in the way of surprises but it did confirm one thing - there is now a clear and public hawkish consensus building within the Fed and Chair Yellen is on board" with regard to guidance on monetary policy.

Speculation has grown that the bank could lift interest rates as early as next month, although most experts say that is unlikely and that December or February would be safer bets.

With an interest rate hike unlikely in the immediate future, the dollar was struggling to gain traction.

Traders prefer to invest or hold currencies in nations where interest rates are rising - or expected to rise - in the hope of increasing their potential returns.

London - FTSE 100: UP 0.3 per cent at 6,838.5 points (close)

Frankfurt - DAX 30: UP 0.5 per cent at 10,587.8 (close)

Paris - CAC 40: UP 0.8 per cent at 4,441.9 (close)

EURO STOXX 50: UP 0.9 per cent at 3,013.0

Tokyo - Nikkei 225: DOWN 1.2 per cent at 16,360.71 (close)

Shanghai - Composite: UP 0.1 per cent at 3,070.31 (close)

Hong Kong - Hang Seng: UP 0.4 per cent at 22,909.54

New York - DOW: DOWN 0.4 per cent at 18,372.7

Euro/dollar: DOWN at US$1.1222 from US$1.1281

Dollar/yen: DOWN at 100.49 yen from 100.55 yen Thursday

Pound/dollar: UP at US$1.3205 from US$1.3187