By Sudeshna Ghoshal and Purvi Agarwal
Sept 22 (Reuters) - European shares closed slightly higher on Tuesday as investors watched for developments in US-Iran tensions that could influence oil prices and risk appetite.
The pan-European STOXX 600 ended 0.1% higher, after posting its biggest daily gain in more than two months on Monday. Most major regional bourses also finished higher.
US President Donald Trump, speaking at the UN General Assembly, called for Iran's complete economic isolation, showing
no intention to resume talks. However, he predicted a deal could be reached after November's US midterm elections. The comments came days after he hinted he could meet his Iranian counterpart.
The war with Iran is deeply unpopular in the US, with Trump's approval rating falling to a record low as inflation hits Americans' pockets.
"Even though hopes are still alive that there may be some kind of breakthrough behind the scenes at the UN conference ... there is still a lot of caution about just how complex the war in Iran has become," said Susannah Streeter, chief investment strategist at Wealth Club.
Hopes for a diplomatic breakthrough and reports that Iran has offered to reopen the Strait of Hormuz within seven days helped push oil prices to two-week lows. European energy stocks reversed earlier declines to end 0.2% higher.
Most STOXX 600 sectors advanced, led by retailers, which posted their biggest one-day gain since early April.
The rise was largely powered by a 12.4% jump in Kingfisher after the home improvement retailer raised its full-year profit guidance.
Technology stocks gained 1.5%, taking cues from the US Nasdaq, which hit an intraday record high.
Broader gains were capped by a 1% fall in banking stocks. Telecom stocks lost 2.1%, with Ericsson dropping 3.8% after Morgan Stanley downgraded its rating on the Swedish telecom equipment maker.
Investors are now focused on a meeting between Trump and Chinese President Xi Jinping, who is due to arrive in Washington on Wednesday for their first talks in more than a decade, amid growing optimism that a trade truce between the world's two biggest economies will be extended.
"The most plausible outcomes will likely be narrow and importantly, reversible in design, including limited tariff relief ..., more procedural agreements or commitments to 'cooperate' on a narrow set of issues, including AI safety and Iran," economists at Oxford Economics said.
"While the macro tail risks from bilateral escalation have eased, the hawkish bias in both sides' foreign policy will persist."
Among individual stocks, Britain's Smiths Group rose 7.5% after the engineering company beat expectations with its full-year operating profit and launched a process to offload its US asbestos liabilities.
(Reporting by Sudeshna Ghoshal and Purvi Agarwal in Bengaluru. Editing by Mrigank Dhaniwala, Harikrishnan Nair and Mark Potter)
