Europe close: Middle East tensions, economic worries hit stocks

European stocks finished with steep losses and at the session's lows as geopolitical tensions and economic worries stoked concerns.

The leader of terrorist group Hamas was killed in a strike overnight while he was in Iran, presumably in response to a deadly attack at the weekend against Israeli civilians in the Golan Heights.

Reuters reported that Iran and its proxies were discussing how they would retaliate.

In response, the benchmark Stoxx 600 index dropped 1.23% to 511.83, Germany’s DAX lost 2.3% to 18,083.05 and France’s CAC 40 erased 2.14% to end at 7,370.45.

Front-dated Brent crude oil futures slipped 0.56% to $80.28 a barrel on the ICE, while the euro fell to 1.0786 against the US dollar.

December gold futures on COMEX advanced 0.62% to $2,488.40/oz. and at one point clambered atop the $2,500/oz. mark.

Overnight, Wall Street had registered enormous gains after a dovish policy announcement out of the Federal Reserve that was interpreted as leaving the door clearly open to a rate cut in September.

The BoE went one step further, unveiling its first rate cut in four years to 5% from 5.25%.

Analysts had been split as to whether or not Bank would lower rates.

The Monetary Policy Committee was similarly dividend with five members voting in favour of reducing rates against four who favoured a hold.

HCOB’s final manufacturing purchasing managers’ index for the euro area edged up to 45.8 for July after a preliminary reading of 45.6 (consensus: 45.6). That was unchanged from June's reading.

Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said: "The widely held belief that the eurozone's recovery would pick up speed in the second half of the year is taking a hit, thanks to the latest HCOB PMI index for the manufacturing sector.

In corporate news, BMW was under the cosh to the tune of -3% after the car maker posted a drop in second-quarter earnings, with Volkswagen and Daimler Truck also lower after results.

Elsewhere, Societe Generale tumbled 9% after cutting the outlook for its French retail bank.

On the upside, drinks and brewing company AB InBev fizzed higher after its second-quarter profits beat expectations.

Shell dipped even as the oil giant reported better-than-expected earnings for the second quarter of $6.3bn and announced a $3.5bn share buyback.

Rolls-Royce surged as it lifted its full-year profit guidance, hailing a strong first half, and said it was reinstating dividends.