Sept 7 (Reuters) - European shares edged lower on Monday as oil prices climbed after a fresh exchange of strikes between the United States and Iran, fuelling inflation concerns and bolstering expectations that the European Central Bank may need to keep raising interest rates beyond this week's meeting.
The pan-European STOXX 600 was down 0.1% at 649.98 points by 0850 GMT.
The Swiss main index dropped 1.2%. Heavyweight Novartis fell 3.4% after its cholesterol drug failed in a closely watched study,
casting doubt on the therapeutic approach.
Germany's DAX fell 0.3%. Over the weekend, the country's far-right AfD topped state elections in Saxony-Anhalt with 44% of the vote, dealing a major blow to Chancellor Friedrich Merz even as it fell short of an overall majority.
It remains unclear whether the AfD can form a government, but Germany's most popular party nationally is seeking a foothold to push policies including strict immigration curbs, restored ties with Russia, reduced backing for Ukraine and an exit from the euro.
"The victory for the AfD underlines the potential for volatility ahead of the French presidential election," Neil Wilson, UK investor strategist at Saxo Markets, said in a note.
Fiscal concerns ahead of next year's election sent French stocks to two-month lows last week.
Energy stocks advanced 1.2%, tracking higher oil prices. Brent crude futures rose more than $1 a barrel as tit-for-tat strikes between the U.S. and Iran on vessels sailing in the Strait of Hormuz and other areas heightened concerns of a prolonged supply disruption. [O/R]
Investor morale in the euro zone rose to its highest reading in over four years in September, a survey showed on Monday, coming ahead of a final reading of the second-quarter euro zone GDP data.
Trading volumes could be lighter than usual with U.S. stock markets closed for a public holiday.
RISING RATE BETS
Higher oil prices have fuelled inflation concerns, triggering a global bond selloff last week and strengthening the case for further policy tightening.
The ECB is widely expected to raise rates by 25 basis points on Thursday, while U.S. CPI data later this week comes into focus after a strong jobs report boosted expectations of a rate hike by the Federal Reserve this month.
Deutsche Bank now expects the ECB to follow a September move with an additional quarter-point increase in December.
While policymakers have signalled little appetite for further tightening, traders are still pricing in another increase by year-end and one more in 2027.
Among other stocks, Italy's Lottomatica rose 6.8% after the betting company provided further details on how its proposed merger with Spain's Cirsa would boost its online business. Cirsa shares rose 7%.
(Reporting by Medha Singh in Bengaluru; Editing by Janane Venkatraman and Sonia Cheema)
