By Sudeshna Ghoshal and Ragini Mathur
Sept 11 (Reuters) - European stocks edged higher on Friday as oil prices retreated from a five-month peak, after a week in which accelerating inflation expectations and elevated bond yields dented sentiment and pushed the market towards its biggest weekly loss in two months.
The pan-European STOXX 600 was up 0.5% at 639.1 points, but logged its steepest weekly fall since early July.
The benchmark closed at a two-month low on Thursday after the European Central Bank
raised interest rates and warned that inflation could remain higher for longer as energy prices surged amid the prolonged Middle East conflict.
Escalating U.S.-Iran attacks since late August on military, shipping and energy assets across the Gulf have pushed oil prices back above $100 a barrel, rekindling inflation concerns in the fuel-dependent euro zone and complicating the ECB's fight against price pressures.
Oil prices, however, fell more than 3% after hitting their highest levels since mid-May earlier in the session. [O/R]
"Although higher interest rates can weigh on valuations, we do not believe the currently anticipated tightening path is sufficient to derail the improving earnings backdrop for European equities," said Mark Haefele, chief investment officer at UBS Global Wealth Management.
"We maintain our preference for European cyclicals, including information technology, industrials and banks, as well as our broader Eurozone equity preference and thematic exposure to European leaders and Swiss mid-caps."
U.S. INFLATION ACCELERATES
In the U.S., closely watched consumer price data showed inflation accelerated in August, while a key underlying measure recorded its biggest rise in four months, reinforcing expectations that the Federal Reserve will raise interest rates next week.
Markets now price in an 87% chance of a quarter-point increase, up from about 72% a day earlier, according to the CME FedWatch tool.
Benchmark 10-year Treasury yields eased after earlier rising close to 5%, while euro zone government bonds steadied. Still, global debt markets were headed for one of their worst weekly performances since the start of the Iran war, as higher energy prices prompted investors to brace for further monetary tightening.
France's CAC 40 jumped 0.8%, recovering after recent weakness as investors weighed a deteriorating growth outlook and concerns over the country's public finances.
Finance Minister Roland Lescure said France was at risk of missing its deficit-reduction target this year after the government cut its growth forecast, adding to pressure on the fiscal outlook.
Among European sectors, telecommunications and banks led gains, rising 1.5% each.
In stocks, FlatexDEGIRO fell 7.9% after the German online broker said Hans-Hermann Lotter had resigned as chairman of its supervisory board with immediate effect.
(Reporting by Sudeshna Ghoshal in Bengaluru; Editing by Nivedita Bhattacharjee, Sonia Cheema and Alex Richardson)
