By Sudeshna Ghoshal
Sept 15 (Reuters) - European shares hit three-month lows on Tuesday, with banks leading losses, as surging oil prices and bond yields sapped risk appetite ahead of the U.S. Federal Reserve's interest rate decision this week.
The pan-European STOXX 600 was down 0.8% at 630.99 points by 0840 GMT, its lowest since June 12. Most major regional bourses also traded lower.
Banks and financial services stocks were among the biggest drags, down 1.3% and 2.7%, respectively. Switzerland's largest
bank UBS fell 4.2%, the biggest decliner among European stocks, while Deutsche Bank dipped 1.2%, UniCredit fell 2.3% and Standard Chartered slipped 2.1%.
Most sectors on the STOXX 600 were down in early trading.
Banking stocks took a hit a day after Bank of America CEO Brian Moynihan warned that the U.S. lender's investment banking fees could drop by at least 10% in the third quarter, and that it expects sales and trading revenue to be nearly flat.
"The warning triggered worries that the bank could not carry on with strong earnings, which in turn helped readjust the earnings outlook to the downside," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
"That's a big fear that the bank earnings may not be as strong as they have been in the last quarter... and that is pulling the valuation (and) the earnings outlook lower."
In a double whammy for markets, rising bond yields are further weighing on risk appetite. The benchmark U.S. 10-year Treasury yield breached 5% on Monday and topped its highest levels in nearly two decades.
As attacks on Gulf energy infrastructure continue, oil prices rose over 3% on Tuesday, reinforcing inflation concerns and prompting markets to increasingly price in rate hikes. The European Central Bank raised interest rates for the second time last week.
Markets are now squarely focused on the Fed's decision on Wednesday, where traders are pricing in an over 90% chance of a rate hike, according to LSEG data.
Separately, data showed Britain's job vacancies fell to a four-year low ahead of the Bank of England's rate decision on Thursday, when it is expected to hold rates steady.
Among individual stocks, Deutz slipped 4.5% after the firm offered up to 10% of its shares in a capital raise.
Evonik Industries shed 3% after Morgan Stanley downgraded its rating on the stock.
Puig shed 3% after the Spanish beauty group said on Monday it would take full control of ISDIN in a €1.20 billion ($1.41 billion) deal.
(Reporting by Sudeshna Ghoshal in Bengaluru; Editing by Diti Pujara)
