By Sruthi Shankar and Shashank Nayar
(Reuters) -European shares ended lower on Friday and dropped nearly 2% this week with travel and banking shares leading the declines over caution around rising tensions between Russia and Ukraine ahead of the weekend.
Caution overtook markets across the globe as Russian-backed separatists in eastern Ukraine said they planned to evacuate their breakaway region's residents to Russia, a shock turn in a conflict the West believes Moscow plans to use to justify an invasion of Ukraine.
The pan-European STOXX 600 index fell 0.8% and dropped 1.9% for the week with travel and banking shares the top weekly losers.
However, news of U.S. Secretary of State agreeing to a meeting next week with Russia's foreign minister, raised hopes of a diplomatic solution and helped limit losses somewhat.
"There is a higher probability either of a diplomatic solution or some kind of an incursion but fairly contained," said Hani Redha, multi-asset manager at PineBridge Investments.
Banking shares have come under pressure this week as rising conflict fears pushed investors towards safer assets, driving short term European yields lower, which have fallen 12 bps this week.
Markets have gyrated this week following news of shelling in eastern Ukraine and warnings from Western leaders that an invasion could happen at any time, even though Moscow has denied it.
While earnings continued to be largely supportive, investors also feared aggressive monetary policy tightening measures from the U.S. Federal Reserve and other major central banks to combat surging inflation.
"Since late last year, we began to reduce risk because we saw a lot of policy withdrawal challenges that markets will have to go through," said Redha.
Allianz (DE:ALVG) fell 3.8% and was the top drag on the STOXX 600 after it announced big bonus cuts for its CEO and board, and a settlement with a "vast majority" of investors, as it braces for the outcome of U.S. regulatory investigations into a multibillion-dollar trading debacle at its funds arm.
Meanwhile, Finnish drug manufacturer Orion jumped 22.2% to the top of STOXX 600 following positive trial results for its prostate cancer treatment.
Luxury group Hermes fell 4.1% after its fourth-quarter sales grew a touch below market expectations and self-imposed production caps meant the group could not keep up with demand for its handbags.
Power utility EDF (PA:EDF) slipped 2.4% after announcing a rights issue, which it said will raise an approximate total of 2.5 billion euros ($2.84 billion).
($1 = 0.8794 euros)