By Twesha Dikshit
May 12 (Reuters) - European shares fell on Tuesday as fading hopes of a U.S.-Iran peace deal pushed oil prices higher and kept investors on edge.
U.S. President Donald Trump called the ceasefire with Iran "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."
The pan-European STOXX 600 shed 0.8% to 607.97 points, as of 0838 GMT. Regional bourses mirrored the move, with Spain's IBEX 35 and Germany's
DAX down 0.9% and 0.8%, respectively.
A closure of the vital Strait of Hormuz has weighed on energy-dependent European markets, keeping them below pre-war levels, as worries remain over the economic impact of the crisis.
"The situation is probably worse for the Euro zone than for the U.S. so the markets are struggling to fully recapture the level that they had shown before," said Uwe Hohmann, equity strategist at Metzler Capital Markets.
"The companies that reported so far (in Europe) are up to a much smaller extent, I think around 3%. But that's a good number, given the overall economic situation in Europe and the sort of growth rates that we typically see here."
Germany's inflation accelerated slightly to 2.9% in April, official data showed on Tuesday. U.S. inflation data later in the day will also be closely gauged to see the impact of the Iran war.
Financials dropped 2% weighing on the broader index, while industrials lost 1%. London banks Barclays, Standard Chartered, Natwest and Lloyds were down between 2.2% and 4.2%.
Britain's Keir Starmer is facing calls to step down following one of the worst defeats for Labour in last week's local elections.
Defence stocks remained under pressure, dipping 1.4%. France's Safran and UK's Rolls-Royce fell 2.3% and 1.5%, respectively. Germany's Rheinmetall and Hensoldt shed 1.6% and 0.8%, respectively.
The energy index gained almost 1% after oil prices rose as much as 2%.
European Central Bank policymaker Joachim Nagel said the bank must raise interest rates if the oil shock due to the Iran war threatens to unmoor inflation expectations in the euro zone.
Money markets currently expect three hikes from the ECB before the end of the year, with the first one expected as soon as the next meeting in June.
Among other movers, Intertek advanced 5.7% 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 jumped 6.3% after the German firm reported a better-than-expected quarterly operating profit.
(Reporting by Twesha Dikshit, Editing by Eileen Soreng)
