European shares slipped on Tuesday as expectations for an imminent end to the Middle East conflict waned after the U.S. launched fresh attacks on Iran.
The pan-European STOXX 600 (.STOXX) dipped 0.2% to 630.33 points by 0833 GMT.
On Monday, the index closed at its highest since February 27 - before the conflict started - and came within 1% of notching an all-time high on hopes that peace in the region could be near.
However, the latest attacks and U.S. Secretary of State Marco Rubio's remarks that negotiating a deal with Iran could "take a few days," tempered those expectations and markets looked for any clues that tensions could escalate further.
Brent crude prices rose over 3%, stoking inflation worries as the euro zone is heavily reliant on oil imports through the Strait of Hormuz.
When asked why markets were more measured in their reaction, Craig Cameron, portfolio manager for Templeton Global Investments at Franklin Templeton said, "the main message that we've got over the weekend is that at least the U.S. seems to think that it is much closer towards some sort of a deal that would essentially normalize traffic through the Strait of Hormuz... so that's what investors are focused on."
Airlines such as Lufthansa (LHAG.DE) and Ryan Air (RYA.I) lost 1.4% and 0.7%, respectively. Morgan Stanley also downgraded the German airline.
Ferrari (RACE.MI) lost 6% after the luxury sports carmaker unveiled its first fully electric car, at a time when competitors, including Porsche (P911_p.DE) and Lamborghini are scaling back their EV ambitions, citing weak demand.
"Clearly, the leadership globally still sits with the Chinese EV makers. And so if I was running one of the sort of traditional European autos, my key question would be, can we compete with these Chinese electric vehicles," Cameron said.
The stock was on track for its biggest daily loss since October and weighed on the automobiles and parts (.SXAP) sector that fell 1.6%.
Later this week, the focus will be on a string of inflation data from major euro zone economies and the United States.
European Central Bank policymaker Yiannis Stournaras said, late on Monday, that if inflation overshoots the ECB target temporarily but significantly, there should be a cautious adjustment of monetary policy in a more restrictive direction.
Traders are currently pricing in at least two interest rate hikes of 25 basis points each before the year ends, according to LSEG-compiled data.
Kingfisher (KGF.L) jumped 2% as traders were relieved that the home improvement retailer kept its guidance for full-year profit unchanged.
