March 11 (Reuters) - European shares declined on Wednesday as investors weighed the economic fallout of the Middle East conflict as it entered its twelfth day and digested a U.S. inflation reading.
The pan-European benchmark STOXX 600 closed 0.6% lower, with most regional bourses also in negative territory.
Germany's DAX fell the most, shedding 1.4%, dragged lower by a 8% drop in Rheinmetall after the defence firm's outlook for profit margin and free cash flow in 2026 fell short of some analyst forecasts.
The decline also pulled the broader defense sector down 1.8%, while the industrial sector fell 1.2%.
Iran's military command said the world should be prepared for oil to hit $200 a barrel, as three more ships came under attack in the blockaded Gulf, while Tehran fired at Israel and targets across the region.
Those events came in sharp contrast to Tuesday's de-escalation hopes sparked by comments by U.S. President Donald Trump that the war was nearly over, which helped the STOXX 600 log its best day since April 2025.
The International Energy Agency (IEA) agreed to release 400 million barrels of oil, the largest such move in its history, to try to restrain soaring crude prices, which continued their upward march. Energy stocks were the biggest gainers on the STOXX 600, up 1.6%.
"Even where actions can provide near-term relief, the dominant driver for sustained (oil) price normalization remains confidence in safe passage and the operational ability for tankers to resume regular transit," said Laura Cooper, global investment strategist and head of macro credit at Nuveen.
"Policy steps may not be sufficient if physical flows aren't credibly restored."
The war has disrupted key shipping routes through the Strait of Hormuz, which carries one-fifth of the global oil trade, lifting oil prices and raising the risk of a price shock. The STOXX 600 has shed 5% from its late February record high.
European Central Bank policymakers acknowledged the economic risk from surging oil prices and promised swift action if they thought higher inflation was at risk of getting entrenched.
Money markets are pricing in an interest rate hike this year, compared to a slight cut before the conflict began, per LSEG-compiled data.
Barclays warned the STOXX 600 could fall to about 550 points if oil prices stay near $100 a barrel.
Banks, among the worst hit in the selloff, lost another 0.6%.
Among others, Legal & General shares declined 6.8% after the insurer missed annual profit expectations.
On the flip side, Balfour Beatty forecast a high-single-digit percentage rise in 2026 profit from operations, sending the construction group about 9% higher.
On the macro front, German inflation eased slightly in February to 2.0%, while U.S. inflation ticked up in line with estimates in February, but was overshadowed by the Iran war.
(Reporting by Avinash P and Purvi Agarwal in Bengaluru; Editing by Rashmi Aich, Vijay Kishore, Alexandra Hudson)
By Avinash P and Purvi Agarwal
