European Shares Tepid as Markets Weigh US-Iran Deadlock

• Defence and luxury shares lead declines
• UK's Compass Group gains on raising annual profit outlook
• Delivery Hero rises after Prosus sells 5% stake to Aspex

By Twesha Dikshit

May 11 (Reuters) - European shares were muted on Monday, as stalled U.S.-Iran peace negotiations pushed oil prices higher and weighed on risk appetite.

The pan-European STOXX 600 .STOXX was flat at 611.68 points, as of 0805 GMT. Regional bourses moved in different directions, with London's FTSE 100 .FTSE edging 0.2% higher, while France's CAC 40 .FCHI slipped 0.7%.

U.S. President Donald Trump rejected Iran's response to a peace proposal by Washington, calling it "totally unacceptable." Tehran proposed ending the war on all fronts, including Lebanon, along with compensation for war damage and claimed sovereignty over the Strait of Hormuz, Iranian state TV said.

"While the re-escalation in hostilities interrupted recent optimism over a potential deal that could reopen the Strait, we still believe an eventual diplomatic solution should emerge," said Mark Haefele, chief investment officer, UBS Global Wealth Management.

"A resilient economic backdrop and robust earnings growth mean that investors should stay positioned for long-term equity gains through diversified exposure."

The war has shuttered the Strait of Hormuz, a vital waterway for a fifth of global oil and liquefied natural gas flows, with soaring oil prices adding to concerns over the conflict's impact on inflation and growth.

Energy-dependent Europe remains vulnerable, with markets still trading about 4% below pre-war levels and lagging global peers that have rebounded on artificial intelligence-driven optimism.

Defence shares .SXPARO fell the most, down 2.1%. Germany's Rheinmetall RHMG.DE and Hensoldt HAGG.DE dropped 9.2% and 5.6%, respectively. Shares of UK's Rolls-Royce RR.L, Bae Systems BAES.L and Babcock BAB.L shed between 3% and 4.3%.

Luxury stocks .STXLUXP in the region shed 1.6%, with Burberry BRBY.L and LVMH LVMH.PA slipping more than 1% each, while Hermes HRMS.PA lost 2.4%.

The telecommunications index .SXKP moved higher. BT BT.L gained 6.5%, while Vodafone VOD.L rose 2.3%.

Martin Kocher, a governing council member of the European Central Bank, warned that the ECB would need to adjust interest rates soon if the inflationary outlook did not significantly improve.

Money markets expect two or more rate hikes from the ECB this year, with the first one expected as early as June.

Among other movers, Delivery Hero DHER.DE advanced 8.2% after Dutch technology investor Prosus PRX.AS sold a 5% stake in the German food-delivery group to activist investor Aspex Management for roughly 335 million euros ($393 million).

UK's Compass Group CPG.L gained 1.7% after the world's largest caterer raised its full-year profit outlook.