Europe stocks mark biggest weekly drop in almost a year as Middle-East conflict persists

By Avinash P, Pranav Kashyap and Purvi Agarwal

March 6 (Reuters) - Europe's STOXX 600 marked its biggest weekly drop in close to a year on Friday as the Middle East conflict showed no signs of abating, while an unexpected decline in U.S. jobs clouded the outlook for interest rate cuts.

The pan-European benchmark .STOXX was down 1%, at its lowest level in more than two months. It shed 5.5% this week. Major bourses in Frankfurt .GDAXI and Paris .FCHI marked their sharpest weekly declines since April last year, while stocks in Madrid .IBEX had their biggest weekly drop in four years.

U.S. President Donald Trump demanded Iran's "unconditional surrender" in an escalation of demands a week into the Middle East war, which could make it more difficult to negotiate a swift end to it.

Banks .SX7P came under pressure again. They lost 1.7%, coming close to a three-month low. HSBC HSBA.L and Allianz ALVG.DE fell 2.6% and 1.6% respectively.

Healthcare companies .SXDP followed with a 1.6% slide, bruised by Zealand Pharma's ZELA.CO 36% slump and Roche's ROG.S 2.9% dip after the mid-stage trial results for its experimental obesity treatment fell short of investor expectations.

Meanwhile, data showed the U.S. economy unexpectedly shed jobs last month and the unemployment rate increased, potentially hinting at a deterioration in labour market conditions.

The data comes at a time when global central banks are exercising caution over their approach to monetary policy as oil prices hit multi-month highs.

"It puts the Fed in a difficult position, especially as the spike in oil prices adds near‑term inflation pressure ... with global geopolitical uncertainty elevated, it is reasonable to expect that job growth may remain subdued in the months ahead," said Angelo Kourkafas, senior global strategist at Edward Jones.

However, policymakers at the European Central Bank played down the need for swift action to combat the situation, even as Europe remained heavily dependent on oil imported via the Strait of Hormuz.

"Europe is a bit more exposed to higher oil prices and there's some concerns that we'll see a stagflationary environment," said Ciaran Callaghan, head of European equity research at Amundi.

The energy index .SXEP on the STOXX 600 was the only one that closed higher on the day, up 0.8%.

Defence companies edged higher on prospects of more demand for weapons. Rheinmetall RHMG.DE and Leonardo LDOF.MI rose 2.9% and 3.4% respectively, while the broader index .SXPARO added 1%.

Europe's fear gauge, the STOXX volatility index .V2TX, spiked to its highest level since April earlier in the week and remained elevated on Friday.

Among other stocks, Sectra SECTb.ST jumped 14%, topping the STOXX 600 after the medical imaging IT firm reported a rise in third-quarter profit.

Universal Music Group UMG.AS, the world's biggest music label, fell 8.1% following a decline in net profit attributable to shareholders. It also put plans for a stock market listing in the U.S. on hold.