European shares start August higher on US-Iran diplomacy hopes

By Tharuniyaa Lakshmi and Avinash P

Aug 3 (Reuters) - European shares started the month higher on Monday as oil prices fell sharply on hopes for renewed diplomatic efforts to end the Iran war, while AstraZeneca sank on reports of merger talks with U.S. rival Bristol Myers Squibb.

The pan-European STOXX 600 index closed up 0.5% at 652.09 points and hovered near a record high it clinched on Friday. Most major regional bourses ended higher but London's FTSE was the only outlier and inched down 0.1%.

Stocks "rock from positive to negative on a near daily basis because again we've got oil prices back down again because President Trump has signalled a more diplomatic tone. But you just don't know what the next week will bring," Lauren Hyslop, investment manager at Mattioli Woods, said.

Oil futures slid more than 4.5%. Trump's decision to hold off on a fresh attack on Iran, while seeking a rapid agreement to curb Tehran's nuclear ambitions and reopen the Strait of Hormuz, eased fears of further supply disruptions. [O/R]

However, Iran said there were no talks under way with Washington and no plans for any meetings.

The fall in crude prices boosted oil-sensitive sectors with travel and leisure gaining 0.6%. Aerospace and defence stocks were the strongest sectoral performers, rising 2.7%.

M&A activity also commanded investors' attention, as markets assessed a fresh batch of deal announcements and reports of potential tie-ups.

AstraZeneca shares tumbled 9%, at the bottom of the STOXX 600 index, after reports of a possible $400 billion merger of the European pharmaceutical giant with U.S.-based Bristol Myers Squibb. The broader healthcare sector dropped 1.7%.

"It's not a great thing for the UK market because AstraZeneca is one of our biggest companies, if that gets taken out and it's taken on by a U.S. company, that's another major UK company that's gone from the market," Hyslop said.

The STOXX 600 added more than 1% in July, with resilient earnings helping investors look past the economic fallout from the U.S.-Iran conflict. The turmoil had pushed Brent crude above $90 a barrel, a particular concern for Europe given the region's dependence on imported energy.

Prysmian edged 0.6% lower after agreeing to buy U.S. electrical products maker Atkore for $95 per share in cash, implying an enterprise value of about $3.8 billion.

Ipsen dropped 8.4% after Jefferies downgraded the French pharma firm to an underperform rating, flagging risks to its Somatuline drug.

Separately, an ECB Economic Bulletin article published on Monday said euro zone household consumption fell sharply in the early weeks of the Iran war as confidence tumbled, underscoring the economic risks of any renewed escalation in the region.

(Reporting by Tharuniyaa Lakshmi and Avinash P in Bengaluru; Editing by Nivedita Bhattacharjee and Andrew Heavens)