European shares declined on Wednesday as investors weighed the economic fallout from the 12-day Middle East war and digested a slate of mixed corporate updates.

The pan-European benchmark STOXX 600 .STOXX fell 1% to 600 points by 0927 GMT with most major sectors in negative territory.

Among regional indexes, Germany's DAX .GDAXI fell the most, shedding 1.7%, weighed down by a nearly 5.9% drop in Rheinmetall RHMG.DE after the defence firm's 2025 sales growth outlook fell short of some analyst forecasts.

The decline also pulled the broader defense .SXPARO sector down 2.8%, while the industrial .SXNP sector fell 2%.

The U.S. and Israel traded air strikes with Iran following heavy bombardments the previous day, contrasting with U.S. President Donald Trump's comments that sparked hopes of a de-escalation and helped the STOXX 600 log its best day since April 2025 on Tuesday.

"There is a chance that the Iran war will not be done and dusted quickly," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

The war has disrupted key shipping routes through the Strait of Hormuz, which carries one-fifth of the global oil trade, lifting oil prices and raising the risk of a price shock and trimming more than 5% off the STOXX 600 from its late February record high.

European Central Bank policymakers are also contending with sluggish growth in the region, while renewed inflation fears have increased bets for an interest rate hike this year, as per LSEG data. This is a sharp contrast to a previous expectation of a slight cut before the conflict began.

The ECB will move quickly and decisively if more expensive fuel due to the Iran war feeds into durably higher eurozone inflation, policymaker Joachim Nagel told Reuters.

Beata Manthey, Citigroup's European Equity strategist also flagged supply chain risks stemming from disrupted commodity flows.

"While some sectors' hedging practices could offset the recent rise in commodity prices over the near term, margins could nevertheless prove hard to protect should input prices remain high for a sustained period," Manthey said in a note.

Barclays warned the index could fall to about 550 points if oil prices stay near $100 a barrel.

Among other movers, GerresheimerGXIG.DE slumped 9.2% after the German medical equipment maker deferred the release of 2025 financial statements to June, citing probes into its business deals.

Legal & General LGEN.L shares declined 5% after the insurer missed annual profit expectations.

On the flip side, Balfour BeattyBALF.L forecast a high-single-digit percentage rise in 2026 profit from operations, sending the construction group 7.3% higher.

On the macro front, the inflation in euro zone's largest economy eased slightly in February to 2.0%. Attention now turns to U.S. inflation data due later in the day as well as comments from European Central Bank President Christine Lagarde, Vice President Luis de Guindos and board member Isabel Schnabel.

-Reporting by Avinash P in Bengaluru; Editing by Rashmi Aich and Vijay Kishore/Reuters