British shares retreated on Thursday, pulled down with wider European markets after a renewed round of U.S.-Iranian strikes undercut expectations for a ceasefire and the European Central Bank cautioned that energy-driven inflation may be more persistent than investors had assumed.
At 03:26 ET (07:26 GMT), the FTSE 100 was 0.92% lower. Germany's DAX fell 0.34% and France's CAC 40 slipped 0.41%. Sterling moved down 0.18%, trading at $1.3402.
Immediate market trigger
The market decline followed new U.S. military strikes near Bandar Abbas on Wednesday. U.S. officials said the strikes targeted a ground control station that was about to launch drones at commercial and military shipping in the Strait of Hormuz.
Iran's Revolutionary Guards said before dawn on Thursday that they retaliated by striking the U.S. air base from which the attack originated. Kuwait reported that its air defenses were intercepting missiles and drones. The exchanges represented the most direct cross-fire in several days and dominated market attention.
Diplomacy and political signals
The military actions overshadowed diplomatic signals that had appeared to be building momentum. President Donald Trump told reporters at a Cabinet meeting that Iran was "negotiating on fumes," and added "maybe we have to go back and finish it, maybe we don't." Secretary of State Rubio said there had been "progress and interest" toward an agreement and that diplomacy remained Washington's first option.
The White House also dismissed an Iranian state television report that showed what it called a draft "Islamabad Framework" memorandum under which Tehran would manage Strait transit, calling that report "a complete fabrication."
Hard-line positions from Tehran
Hard-line messages from Iranian authorities compounded the uncertainty. Iran's Supreme National Security Council stated that its stockpile of enriched uranium was not negotiable. A senior Iranian lawmaker warned that even a U.S. agreement "would not mean the end of the war."
Deputy foreign secretary Ali Bagheri Kani insisted that all frozen Iranian assets must be returned "fully and unconditionally" - a demand President Trump has already ruled out.
Central bank concerns over energy-driven inflation
At a conference in Tokyo hosted by the Bank of Japan and its think tank, ECB chief economist Philip Lane said the energy shock stemming from the Middle East conflict would likely have a persistent effect on inflation, even if the crisis were resolved quickly. Lane warned of "second-round effects" as countries rebuild inventories and diversify energy supplies.
Markets have fully priced in two ECB rate hikes and see roughly even odds of a third, according to pricing referenced at the time of the comments.
The convergence of renewed military action, firm rhetoric from Iranian officials and central bank commentary on inflation dynamics weighed on risk appetite in Europe and pushed UK equity benchmarks lower as investors reassessed geopolitical and policy risks.