By Twesha Dikshit
May 21 (Reuters) - European shares were subdued on Thursday after a rally in the previous session, with bonds weakening and oil holding above $100 a barrel as investors awaited progress in U.S.-Iran peace talks.
Iran said it was reviewing Washington's latest response to end the war, while U.S. President Donald Trump said he was prepared to wait to "get the right answers" from Tehran, but attacks would renew if no deal was reached.
The pan-European STOXX 600 was flat at 620.28 points,
as of 0806 GMT, after ending up 1.5% higher on Wednesday near two-week highs.
Local bourses were mixed with Germany's DAX and France's CAC 40 both flat.
Preliminary data showed France's private sector economy contracted in May at its fastest pace in over five years, while a separate survey showed Germany's private sector contracted for a second month.
European equities have been unable to bounce back to pre-war levels as the region's dependence on oil imports and small AI tech exposure has held it back, while global shares have rallied.
"Despite the fall that we saw in oil prices yesterday and the AI optimism that is trying to push in today, the geopolitical matters remain quite discluding for investors to fully give in," said Ipek Ozkardeskaya, senior market analyst at Swissquote.
"The market's narrative is not fully being driven by the AI optimism here in Europe. Investors are cautious and they are actually watching the yields and the borrowing cost."
Sources told Reuters that the case for a European Central Bank rate hike in June was nearly sealed, but the bank is likely to be noncommittal about a further move.
Money markets currently price in more than two rate hikes from the ECB before year-end.
Bank shares weighed on the index, down 0.4%. The oil and mining index were both lower
EasyJet posted a first-half loss in line with expectations, and said its full-year outlook remains uncertain amid the Iran war. The British budget airline was up 0.5%.
Italy's top insurer Generali gained 2.1% after first-quarter results beat expectations and maintained its 2027 targets.
QinetiQ jumped 6.3% after the defence group announced £200 million ($268.34 million) share buyback and 3% to 5% revenue growth for 2027.
Autotrader fell almost 4% after the British automotive marketplace reported a flat revenue in April as customer numbers dropped.
(Reporting by Twesha Dikshit; editing by Harikrishnan Nair)
