By Ozan Ergenay, Johann M Cherian and Ankika Biswas
(Reuters) -Europe's main stock index notched its biggest one-day drop in over nine months on Tuesday, with miners and banks leading losses, as investors steered clear of risky assets owing to heightened tensions in the Middle East.
The pan-European STOXX 600 closed 1.6% down, touching its lowest level since March 7, in a broader market decline. Higher euro zone bond yields also pressured equities.
Basic resources fell 3.1%, its biggest one-day decline since mid-August, as copper prices retreated on frail China factory data and a firm U.S. dollar.
Banks lost 2.6%, their biggest one-day drop since August, dragged by 3% declines in Britain's HSBC (LON:HSBA) and euro zone's largest bank BNP Paribas (EPA:BNPP).
Among other sectors, automobiles, insurance and energy also lost around 2% each.
Main indexes in Germany, France, Italy and Spain shed over 1% each, tracking a global risk-off mood as the world awaited Israel's response to Iran's first-ever direct attack against the country.
"There are upside risks relating to Middle East tensions and these will add to central banks' caution, but we still see the ECB and Bank of England cutting rates from June," Capital Economics chief global economist Jennifer McKeown wrote.
However, European Central Bank policymakers continued to make the case for a June rate cut as inflation remains on course to 2% by next year, even if the price path still proves bumpy.
Earlier in the day, brokerages Morgan Stanley (NYSE:MS) and Deutsche Bank (ETR:DBKGn) said they expect the ECB to reduce borrowing costs by 75 basis points this year, on uncertainty over the U.S. Federal Reserve's rate cut outlook and sticky domestic inflation.
Investors' confidence of early rate cuts had sparked a rally in the STOXX 600 since late 2023, last seen hitting a record high earlier this month.
Focus is now on quarterly results, with earnings expected to decline 12.1% in the first quarter year-on-year, fresh LSEG data showed.
Among individual movers, the world's second largest steelmaker ArcelorMittal slumped 6.9% following a Deutsche Bank rating downgrade to "hold" from "buy".
Barry Callebaut jumped 6.7% after Stifel upgraded the chocolate maker stock to "buy" from "hold".
Fresenius gained 4.6% after the German healthcare firm announced the launch of Tyenne in the U.S. for treating chronic autoimmune diseases.
Danish insurer Topdanmark climbed 4.3% following better-than-expected first-quarter profit and higher profit guidance.
Naturgy rose 3.4% after holding vehicle Criteria confirmed talks with a potential investment group regarding the Spanish energy firm.