By Avinash P and Johann M Cherian
March 23 (Reuters) - European shares fell to a four-month low on Monday and were set to confirm a correction as a spike in crude prices raised expectations of interest rate hikes by the European Central Bank amid the escalating Middle East conflict.
The pan-European STOXX 600 was down 2.2% at 561.11 points after logging its third straight weekly loss on Friday.
The index has fallen more than 11% from February's record closing high, its first such drop since the April
2025 selloff on U.S. tariff worries.
An index tracking market volatility jumped 4 points to a two-week high of 35.8.
Bank-heavy Spanish and Italian indexes led declines. Financials are often seen as most sensitive to economic growth expectations.
Iran threatened to attack Israeli power plants and facilities supplying U.S. bases in the Gulf if U.S. President Donald Trump carries out his threat to "obliterate" Iran's power network, which sent crude prices to over $100 a barrel.
Energy price-sensitive airlines such as Air France declined 5% and Lufthansa fell 4%, while rate-sensitive real estate led sectoral declines.
Still, Mark Haefele, chief investment officer at UBS Global Wealth Management said "investors should stay invested and (be) positioned for upside, as trading geopolitical events is rarely a winning strategy."
The STOXX index now lags the U.S. S&P 500 as the region is dependent on oil imports via the Strait of Hormuz which acts as a conduit for one-fifth of the global oil trade.
The waterway's closure has stoked inflation concerns, leading investors to now price in at least two 25-basis-point rate hikes by the European Central Bank this year, according to data compiled by LSEG, up from zero earlier in the year.
Goldman Sachs now expects the ECB to deliver two 25-basis-point interest rate hikes this year, joining peers J.P. Morgan and Barclays.
Traditional safe-havens sovereign bonds and precious metals also took a hit, with the yield on the German benchmark bund hitting 2011 highs.
Spain proposed fiscal measures to counter the economic impact of higher energy costs, bringing back the focus on elevated government debt.
Telecom Italia added 3.2% after postal service Poste Italiane announced it was launching a cash-and-share offer to buy the former phone monopoly for 10.8 billion euros ($12.5 billion). Poste Italiane declined 8.5%.
German company Delivery Hero advanced 1.7% after selling its food delivery business in Taiwan to Grab Holdings for $600 million.
Pandora shares jumped 6.1% on lower precious metal prices, which are a key material for the Danish jeweller.
(Reporting by Avinash P and Johann M Cherian in Bengaluru; Editing by Sherry Jacob-Phillips and Nivedita Bhattacharjee)
