STOXX 600 falls as fragile Middle East ceasefire dents risk sentiment

By Twesha Dikshit and Avinash P

May 12 (Reuters) - Europe's STOXX 600 closed 1% lower in broad-based declines on Tuesday as dimming hopes for a U.S.-Iran peace deal sent oil prices higher and weighed on risk sentiment.

The pan-European STOXX 600 .STOXX dropped 1% to 606.63 points, with all major regional bourses in the red, led by Frankfurt's DAX .GDAXI which fell 1.6%.

The disruption to energy supplies through the Strait of Hormuz has acted as an overhang on European equities, keeping them below pre-war levels, as worries linger over the economic impact of elevated crude prices.

Technology shares .SX8P slid 3.1% and led declines on Tuesday, tracking steep losses among AI stocks and chipmakers on Wall Street. Tech stocks globally had a strong run over the past few weeks and in Europe they are among the top gainers.

INFLATION DATA

"The rising price of oil also shows the energy dependence of Europe, and that dependence is harming European companies more than elsewhere. This is a brilliant reminder that there's also military dependency, security dependency in Europe, which places Europe into basically the shackles of dependency," Florian Ielpo, head of macro at Lombard Odier Investment Managers, said.

Reflecting increasing price pressures, a final estimate showed Germany's inflation accelerated slightly to 2.9% in April, while elsewhere U.S. consumer prices rose at a steady pace for a second straight month in April.

U.S. President Donald Trump said the ceasefire with Iran was "on life support", with Tehran rejecting a U.S. proposal to end the conflict and proposing a list of demands that Trump dismissed as "garbage".

Defence stocks .SXPARO remained under pressure, lost 1.8% and marked their fourth straight day of losses.

POLITICAL UNCERTAINTY IN BRITAIN

Meanwhile in Britain, Prime Minister Keir Starmer was facing calls to step down following one of the worst defeats for Labour in last week's local elections.

British heavyweight banks such as Barclays BARC.L and Lloyds LLOY.L fell 3% and 4%, respectively.

A 6% fall in Munich Re MUVGn.DE weighed on the insurance sector .SXIP after the German reinsurer posted disappointing property and casualty revenue in the first quarter.

On the policy front, European Central Bank policymaker Joachim Nagel said the bank must raise interest rates if the oil shock due to the Iran war threatened to unmoor inflation expectations in the euro zone.

Money markets currently expect three hikes from the ECB before the end of the year.

Among others, Intertek ITRK.L advanced 6.4% after Swedish private equity group EQT made a final sweetened 9.4 billion pound ($12.7 billion) takeover proposal for the British product testing company.

Shares of Bayer BAYGn.DE jumped 3.6% after the German firm reported a better-than-expected quarterly operating profit.