By Sudeshna Ghoshal and Purvi Agarwal
Sept 25 (Reuters) - European shares snapped a three-week losing streak on Friday as oil prices retreated for most of the week, although investors remained cautious about developments in the Middle East and surging bond yields.
The pan-European STOXX 600 closed 0.4% higher on Friday, adding to the week's 0.5% advance. It was also the index's biggest weekly gain since early August. In the previous three weeks, the index had lost around 3%.
Oil prices fell again on
Friday as truce hopes outweighed Houthi attacks on Saudi Arabia. [O/R]
Negotiators are exploring a phased path out of war that would involve Tehran reopening the Strait of Hormuz and Washington lifting its economic blockade of Iran, sources close to the talks said this week.
"Even though the conflict in the Middle East seems like it's potentially reaching a positive phase of dialogue and agreement, there's still a lot of uncertainty because we've been here before," said Daniela Hathorn, a senior market analyst at Capital.com.
Energy shares fell 1.3% and were the biggest sectoral losers.
By contrast, oil-price-sensitive airline stocks advanced, with Ryanair and Lufthansa gaining more than 2% each. The travel and leisure index rose 0.8%.
The biggest boost came from heavyweight banks, which were the top gainers, up 1.3%. Financial services followed with a 1.1% rise.
Shares of banking major UBS rose 3.5%. A Semafor report said the bank had revived discussions to exit Switzerland.
Euro zone government bond yields were on track for their seventh consecutive weekly rise as crude prices remained near $100 a barrel and increasingly hawkish signals from central banks pushed up expectations for policy rates.
With market moves increasingly intertwined with oil prices, a retreat to below $100 a barrel earlier this week helped global equities stage a rally, though it fizzled out on Wednesday.
"Absent a shock or surprising economic or political developments, the STOXX 600 could continue to grind higher through year-end," said Paige Henderson, senior portfolio manager and head of the resilient global equity team at Allspring Global Investments.
Though Henderson warned that higher-for-longer oil prices could pressure interest-rate expectations, posing as a headwind for equities. The ECB lifted interest rates earlier this month.
Separately, German consumer sentiment weakened more sharply than expected heading into October, as rising energy prices soured households' income outlook, a survey showed.
Among individual stocks, Finland's Konecranes jumped to the top of the STOXX 600, up 7.4% after the industrial equipment maker launched a buyback programme and raised its financial targets.
Glencore PLC rose about 2% after UBS upgraded its rating on the miner's stock to "buy" from "neutral".
(Reporting by Sudeshna Ghoshal, Purvi Agarwal and Niket Nishant in Bengaluru; Editing by Sherry Jacob-Phillips, Harikrishnan Nair and Tasim Zahid)
