European shares hit one-week low as Middle East risks deepen

By Johann M Cherian, Utkarsh Hathi and Ragini Mathur

June 1 (Reuters) - European stocks fell on Monday as escalating tensions in the Middle East dampened hopes for a near-term resolution to the Iran war, while investors also digested dealmaking headlines involving Britain's easyJet.

The pan-European STOXX 600 index ended a volatile session down 0.8% to a more than one-week low of 621.24.

The benchmark opened weaker after the U.S. and Iran said they had exchanged fire over the weekend, with losses deepening after Iran's Tasnim news agency reported Tehran had halted talks with Washington over attacks on Lebanon.

Tasnim also reported that Iran and its allied "Resistance Front" were considering measures to block the Strait of Hormuz and disrupt other key waterways, including the Bab el-Mandeb Strait. Crude prices rose more than 6.5%, adding to concerns for energy-dependent Europe.

"Markets know that oil stockpiles are being rapidly run down. And the rosy assumptions around the renewal of supplies involved the straits being open by June, no such opening is in sight, and each day brings the crunch point closer,” said Chris Beauchamp, chief market analyst at IG Group.

Most major sectors finished in negative territory. Energy stocks, by contrast, climbed 1.7%.

Despite the uncertainty, analysts said corporate earnings and forecasts have held up better than expected this reporting season, with Goldman Sachs raising its 12-month target for the benchmark STOXX to 660.

"The commentary out of quarter one from a lot of these companies was positive around sales and margins and consumer behaviour, but they all mentioned uncertainty," said Michael Field, a strategist at Morningstar.

"So I would expect when we see earnings being reported for quarter two, we're going to see a stagnation at the very least, if not a pullback," he said, noting that consumer sectors were especially vulnerable.

The luxury sector, which most investors categorise as consumer discretionary, is down more than 18% this year.

In M&A news, easyJet jumped 10% after Castlelake said it was considering a potential takeover bid, with the British budget airline calling the U.S. investment firm's timing "highly opportunistic" given the impact of the Iran war.

Software stocks advanced, extending a recovery as gains in U.S. peers eased concerns over AI-driven disruption.

SAP, Europe's largest software company by market value, rose 8.1%, while Sage, Dassault Systemes, Nemetschek and Temenos gained between 7% and 8%, helping lift the European tech sector.

Among other major movers, Wise tanked 8% on news that the Brussels Public Prosecutor's Office is investigating the digital money transfer company for suspicious transactions worth half a billion euros.

(Reporting by Johann M Cherian, Utkarsh Tushar Hathi and Ragini Mathur in Bengaluru; Editing by Sherry Jacob-Phillips, Janane Venkatraman and Joe Bavier)