European shares slide as Middle East tensions flare

European shares fell on Friday in broad-based losses, as an escalation in the U.S.-Iran conflict lifted oil prices and dampened hopes that a diplomatic solution could be close.

U.S. President Donald Trump said the ceasefire was still in effect despite forces clashing in the Gulf, with Washington awaiting a response from Tehran to its proposal to end the conflict.

The pan-European STOXX 600 .STOXX fell 0.9% to 610.96 points as of 0809 GMT, and looked set for a weekly loss, if current levels hold.

Major regional markets mirrored the move, with Germany's DAX .GDAXI and London's FTSE 100 .FTSE down 1% and 0.8%, respectively.

"Once again, the news flow on the geopolitical front has shown that the path towards a lasting agreement is anything but linear," said Chris Weston, Pepperstone's head of research.

"The 'buy the dip' mentality in risk assets remains very much alive, and that is unlikely to change. But risk management is the key theme of the day."

European equities have remained sensitive to geopolitical headlines, with the region's energy dependence weighing on markets and raising concerns over the impact on inflation and growth.

Also weighing on sentiment was Trump's threat that the European Union would face 'much higher' tariffs if trade deal commitments were not implemented by July 4.

All ten major indexes fell in early trading, with financials .SX7P and industrials .SXNPthe biggest drags, down 1% each.

Rheinmetall RHMG.DE tumbled 5% after JP Morgan downgraded the stock to neutral from overweight. The German defence group's results this week showed first-quarter revenue below analysts' expectations.

British Airways owner IAG ICAG.L shed 2.1% after forecasting lower annual profit than previously anticipated due to soaring jet fuel costs. The travel index .SXTP fell 1.2%.

Commerzbank CBKG.DE said it plans to cut 3,000 jobs to help it reach more ambitious profit targets as it fends off a takeover by Italy's UniCredit CRDI.MI. Both stocks were down.

European Central Bank's Isabel Schnabel warned of the rising risk of high inflation due to the Iran war and said rates would need to rise if the energy shock broadens.

Markets currently price in three or more rate hikes from the ECB over the next 12 months.

"The ECB will likely go ahead with a decision to address the increased risks of inflation, although such a move would be less certain if tensions in the Persian Gulf ease rapidly," Commerzbank economists said in a note.

Among other movers, Amadeus AMA.MC rose 5.4% after the Spanish travel technology company reported quarterly core earnings above market expectations and maintained its guidance.

-Twesha Dikshit/Reuters