April 1 (Reuters) - European stocks extended their rally on Wednesday, with the STOXX 600 notching its biggest three-day advance in nearly a year after U.S. President Donald Trump said Washington will be "out of Iran pretty quickly."

The pan-European index rose 2.5% to 597.69 points, led by a 5.9% jump in defence shares and a 4.5% gain in heavyweight banks.

With the war in its fifth week and the White House under pressure to de-escalate amid rising gasoline prices, Trump said the U.S. would leave Iran soon, but kept open the possibility of returning for "spot hits" if needed.

The jump in equities comes even as investors have been wrong-footed by repeated false dawns over the last month.

"As the conflict and waterway closure continue, global markets must increasingly consider how long until this shifts to a genuine negative supply shock," said PIMCO economist Tiffany Wilding.

Most major regional bourses traded higher, with the financials-heavy Spanish and Italian benchmarks rising more than 3% each.

Brent crude futures fell, pushing the STOXX energy index down 2.5%.

But airline stocks received a boost from the drop in oil prices, with shares of Air France and Lufthansa jumping 8.9% and 8%, respectively. The sector had taken a beating in March after the closure of the key Strait of Hormuz sent oil prices surging. 

"Iran has found that it has a certain power over the rest of the world through this control of the Strait, and they might wish to keep that," said Kiran Ganesh, multi-asset strategist at UBS Global Wealth Management.

"It's also not clear whether everybody on the Iranian side will have the same view in terms of how to negotiate and we know that the troops from the U.S. are still in the region, so the prospect of renewed escalation is also still there."

MASSIVE MARCH DECLINES

European shares have been under pressure since the U.S. and Israel began airstrikes on Iran on February 28 due to the continent's heavy reliance on oil imports through the largely blocked-off Strait of Hormuz. 

The STOXX recorded its steepest monthly decline since June 2022 in March. 

Among individual movers, Britain's Babcock International Group rose 9.5% after it agreed to a six-month bridging contract with the UK's Ministry of Defence to maintain naval ?base and nuclear submarine fleet support services. 

Index provider MSCI, meanwhile, said Greek stocks will return to its developed markets index in May 2027.

Greece's benchmark was up 3.4%.

J.P.Morgan had earlier flagged that STOXX could announce by April that it will include Greek shares in the European benchmark index.

 Analysts at the firm said that they were unhappy about Greece's potential promotion as it would comprise a smaller share in developed market indexes than emerging market gauges.  

(Reporting by Avinash P, Johann M Cherian and Niket Nishant in Bengaluru; Editing by Janane Venkatraman, Shinjini Ganguli and Jonathan Ananda)

By Avinash P, Johann M Cherian and Niket Nishant