The ECB has kept the rates steady since September as policymakers awaited a few more comforting wage indicators to accompany benign inflation figures before starting rate cuts.

The pan-European STOXX 600 was down 0.1% in volatile trading as of 1248 GMT from declines of nearly 0.5% earlier in the session.

Indexes of top economies in the currency union such as Germany, France, Italy and Spain traded between flat and 0.6% lower.

Rate-sensitive sectors such as real estate gained 0.5%, while banks lost 1.5%.

"The ECB is growing steadily more optimistic that the conditions for policy easing are falling into place," said Mark Wall, chief European economist at Deutsche Bank Research.

"The question is whether the ECB's ongoing caution on domestic inflation means back-to-back cuts in June and July are less likely?"

The euro hit a two-month low and eurozone bond yields slipped, with traders pencilling in over 72 basis points of rate cuts by the end of the year. [GVD/EUR][0#ECBWATCH]

Separately, investors also parsed a cooler-than-expected March producer inflation data in the United States.

After a lacklustre week, the STOXX 600 hit a one-month low in the previous session after a hot U.S. inflation report sparked concerns on the timeline for the Federal Reserve's first interest-rate cut, while raising expectations that the ECB could lower rates before its U.S. counterpart.

Among stocks, Societe Generale shares topped the French blue-chip index CAC 40 and were up 1.6% after the lender said it had agreed to sell a professional equipment financing business to rival BPCE for 1.1 billion euros ($1.18 billion).

The telecoms sector was among top sectoral decliners, dragged down by a 5.5% drop in Deutsche Telekom as the company traded ex-dividend.

Offsetting declines, the oil and gas sector climbed 1%, tracking an uptick in crude prices.

Lufthansa dropped 2.2% after the German carrier extended a suspension of its flights to Tehran, with the Middle East on alert for Iranian retaliation for a suspected Israeli air strike on the country's embassy in Syria.

Idorsia postponed its 2023 and first-quarter results publication, sending the Swiss biotech firm's shares down 25.5%.

AstraZeneca rose 3% and was among the top gainers on UK's FTSE 100 index after the drugmaker said it planned to increase its annual dividend by 7% for 2024.

(Reporting by Johann M Cherian and Ozan Ergenay; Editing by Shounak Dasgupta and Arun Koyyur)

By Johann M Cherian and Ozan Ergenay