Updates after market close

By Johann M Cherian, Tharuniyaa Lakshmi and Niket Nishant

July 8 (Reuters) - European shares posted their steepest one-day drop since mid-March on Wednesday after U.S. President Donald Trump cast fresh doubt over peace prospects in the Middle East, rekindling worries about oil prices and inflation.

The pan-European STOXX 600 index .STOXX fell 1.8% to 634.91 points, its lowest in a week.

The declines jolted investors who had grown more comfortable with regional equities in recent days, encouraged by signs of softer inflation and hopes that further rate hikes may not be needed.

It also underscored that fragile geopolitics can still quickly unsettle markets.

"As far as I'm concerned, it's just a waste of time dealing with them," Trump said of Iran. The U.S. and Iran also traded strikes, and Washington re-imposed sanctions on Iranian oil.

"We're all frustrated with how things are going. But ultimately I think everyone, including President Trump, would like to see this behind us," said Nick Niziolek, co-chief investment officer at Calamos Investments.

SPANISH EQUITIES TUMBLE

With a loss of 2.7%, Spain's IBEX index .IBEX was the biggest loser among regional bourses.

The benchmark suffered its worst day since early March after Trump said he had ordered Treasury Secretary Scott Bessent to cut off all trade with Spain and called Madrid a "terrible partner."

Niziolek, however, said he would not be making any adjustments to his portfolio based on the criticism.

"As shocking as it sounds in the headlines, we've grown accustomed to these types of statements," he said.

Across Europe, basic resources .SXPP and construction and material stocks .SXOP were among the biggest drags on the benchmark index, losing 4.4% and 3.7%, respectively.

Auto stocks .SXAP also slipped 3.7%, while a jump in crude prices lifted the energy sector .SXEP by 1.9%.

Higher crude prices weighed on airlines including Air France AIRF.PA and Wizz Air WIZZ.L, which lost 6.6% and 5%, respectively.

"You're likely to see downbeat sentiment spread. It's a major setback just as nations around the world have been breathing a sigh of relief," said Susannah Streeter, chief investment strategist at Wealth Club.

Markets had been paring expectations for another interest rate hike by the European Central Bank this year, and policymakers had flagged that growth and inflation risks were more balanced following the recent ceasefire.

However, following Tuesday's developments, traders are now pricing in around 42 basis points of hikes this year, LSEG-compiled data showed, up from 25 bps on Tuesday.

Investors also kept a close watch on technology stocks globally, which have had a shaky start to July after a strong AI-driven June quarter.

South Korean equities .KS11 closed 20% below a record high reached in June, confirming a bear market. The tech-heavy Nasdaq .IXIC closed below its 50-day moving average overnight, indicating weak short-term momentum.

European technology stocks were mixed, with chip equipment maker ASML ASML.AS up 1.3% and chip company Aixtron AIXGn.DE dropping 2.7%.

Among individual stocks, Bahnhof BAHNb.ST jumped 17.1% after telecom operator Telenor TEL.OL agreed to buy a controlling stake in the Swedish broadband provider in a deal valuing it at 6.1 billion Swedish crowns ($629.7 million).