By Sudeshna Ghoshal and Ragini Mathur
Sept 9 (Reuters) - European shares dropped on Wednesday to their lowest in more than a month after crude prices surged above the key $100 a barrel mark as escalating Middle East tensions heightened inflation concerns and dampened risk appetite.
The pan-European STOXX 600 was down 1.4% at 640.41 points, hitting the lowest since late July. Most of the regional bourses also traded sharply lower.
Finland's blue chips were a bright spot, firming 0.8% to hit their highest
in nearly three months.
Fortum led gains on the STOXX 600, climbing 15.8% after the Finnish energy group signed a long-term power purchase agreement with Google. The tech giant said it would invest at least €13 billion ($15.1 billion) in AI infrastructure in Finland over the two years.
Brent futures topped $100 a barrel for the first time since late July after Iran and the U.S. struck tankers in the biggest wave of shipping attacks since the war began, raising the prospect of further disruptions to Middle East energy supplies.[O/R]
Energy was the only sector in positive territory, up 0.3%, while all other major sectors declined. The Euro STOXX volatility index rose 2.17 points to its highest level in a week.
"Higher oil prices mean higher inflation expectations, which also means higher chances of interest rate hikes and the higher bond yields," said Kiran Ganesh, managing director, global head of investment communications at UBS.
"So oil is the key driver, and it's having a compounding negative impact on equities over the past few days."
With volatility rising, investors appeared reluctant to add risk ahead of a packed run of central-bank decisions and economic data that could shape expectations for growth and borrowing costs.
Euro zone government bond yields reached fresh multi-year highs on the day before the European Central Bank meeting as traders priced in two hikes in 2026 and a 3.1% rate by late 2027.
"There is a risk that, the ECB perhaps overreacts to the move in oil prices, and then that causes a more negative impact on the rest of the economy," Ganesh said.
Markets widely expect the ECB to raise rates on Thursday, according to LSEG-compiled data, with U.S. inflation figures later this week also likely to influence trading.
France plans to reduce, but not abolish, the exceptional corporate tax surcharge imposed on very large companies in its 2027 budget, Prime Minister Sebastien Lecornu said in a letter to executives, pledging tax stability to support growth.
Among other movers, shares of Auto1 Group SE shed 6.4% after Christian Wallentin stepped down as CFO of the German-based online platform for buying and selling used cars.
Zara owner Inditex fell 3.6% after the Spanish fast-fashion retailer reported weaker than expected second-quarter profit.
(Reporting by Sudeshna Ghoshal and Ragini Mathur in Bengaluru; Editing by Sherry Jacob-Phillips, Mrigank Dhaniwala and Joyjeet Das)
