European shares retreat as Middle East tensions flare

European shares dropped on Friday, with an escalation in U.S. and Iran fighting sending oil prices higher and dampening hopes that a diplomatic solution could be close.

U.S. President Donald Trump said the ceasefire was still in effect despite forces clashing in the Gulf, with Washington awaiting a response from Tehran to its proposal to end the conflict.

The pan-European STOXX 600 fell 0.8% to 611.69 points as of 0703 GMT. Major regional markets mirrored the move, with Germany's DAX and London's FTSE 100 down 0.9% and 0.5%, respectively.

European equities have remained sensitive to geopolitical headlines, with the region's energy dependence weighing on markets and raising concerns over the impact on inflation and growth. Financial markets currently price in three or more rate hikes from the European Central Bank over the next 12 months.

Also weighing on sentiment was Trump's threat that the European Union would face 'much higher' tariffs if trade deal commitments weren't implemented by July 4.

Among early movers, British Airways owner IAG tumbled 5.2% after forecasting lower annual profit than originally anticipated due to soaring jet fuel costs.

Spanish travel technology company Amadeus rose 3.7% after reporting quarterly core earnings above market expectations and maintaining its guidance.

(Reporting by Twesha Dikshit; Editing by Mrigank Dhaniwala)

Copyright Reuters or USA Today Network via Reuters Connect.

This story was originally published May 8, 2026 at 12:10 AM.