By Shashwat Chauhan and Pranav Kashyap
(Reuters) -European shares reversed initial gains to close lower on Tuesday, as investors moved out of riskier assets amid escalating geopolitical fears that Iran was planning an attack on Israel.
The pan-European STOXX 600 closed 0.4% lower, reversing course after rising as much as 0.5% during the day.
A gauge of STOXX volatility spiked to a more than three week high. Most STOXX sectors fell, with euro zone banks leading losses, down 2.8%.
Personal and household goods and retail rounded out top decliners, down 1.7% and 1.3%, respectively.
The United States has indications Iran is preparing to imminently launch a ballistic missile attack against Israel that could be at least as large as a strike that Tehran staged earlier this year, U.S. officials said.
"It's a classic risk-off (move) ... however, it's unlikely to last because when they've (Iran) attacked in the past, it quickly fizzled out," said Giles Coghlan, managing director at GCFX.
"I would expect this dip to be bought quite quickly in equities," Coghlan added.
Bucking the trend, heavyweight energy stocks jumped 1.3% tracking a more than 3% advance in crude oil prices. [O/R]
Defence companies such as Germany's Rheinmetall and Sweden's Saab also rose 5.1% and 3.5%, respectively.
Euro zone government bond yields, which move inversely to prices, extended their declines as investors sought safe-haven assets. [GVD/EUR]
Yields had initially fallen after data showed euro zone inflation dipped below 2% for the first time since mid-2021 in September, reinforcing an already solid case for a European Central Bank rate cut this month.
Rate-sensitive real estate ended up 1.1%, while utilities, often traded as a bond proxy, gained 0.4%.
Meanwhile, manufacturing activity across the euro zone declined at its fastest pace this year in September, while the German manufacturing sector also contracted at its fastest rate in a year, PMI data showed.
France's manufacturing sector continued to contract in September, while Italy's manufacturing activity contracted for a sixth straight month in September.
Among other headlining stocks, chemicals maker Covestro gained 3.8% after Abu Dhabi National Oil Company (ADNOC) said it had struck a deal to buy the chemicals maker for 14.7 billion euros ($16.3 billion), including debt.
Gucci owner Kering (EPA:PRTP) slipped 2.9% after Goldman Sachs downgraded its rating to "sell", while brewer Anheuser-Busch Inbev rose 1.6% after Citi upgraded its rating to "buy".