Updates with closing prices

By Utkarsh Hathi and Ragini Mathur

June 12 (Reuters) - European shares surged on Friday, with major indexes jumping more than 1%, as renewed hopes for a diplomatic breakthrough in the Middle East dragged oil prices lower and injected fresh optimism into the market.

Brent crude futures LCOc1 fell 3.7%, extending the previous session's losses, after U.S. President Donald Trump cancelled plans to strike Iran and said a deal could be reached as soon as this weekend. O/R

The pan-European STOXX 600 index .STOXX advanced 1.9% to 633.21 points, logging 1.7% gains for the week.

Spain's IBEX 35 Index .IBEX outperformed regional peers, climbing more than 2.6% and hitting an all-time high.

"After a week or two in which you actually have seen a bit of two-way price action, mostly on the downside... it has given sentiment across Europe the shot in the arm it was looking for," said Chris Beauchamp, chief market analyst at IG Group.

"European stocks are still cheaper than their US counterparts, particularly in tech... perhaps it's time investors can look again at the stocks in Europe with more confidence because of the lower valuations."

The upbeat end to the week followed a period of heavy turbulence for European shares, with sharp swings in AI-linked tech stocks, pressure on UK-listed banks due to tightening rules in China and a quarter-point rate hike by the European Central Bank.

Traders still expect borrowing costs to rise another 25 basis points before the end of the year, according to data from LSEG.

Energy shares .SXEP were the only laggards on Friday, tracking falling crude prices to decline 1%.

Travel and leisure stocks .SXTP were the day's top performers, rising 4.1% and hitting a five-month high. Airlines Lufthansa LHAG.DE and Air France AIRF.PA added 5.2% and 8.4%, respectively, while integrated tourism group TUI AG TUI1n.DE jumped 8.7%.

The STOXX 600 banks index .SX7P led sectoral gains with a 4.3% rise, with Deutsche Bank DBKGn.DE and Societe Generale SOGN.PA climbing more than 6% each.

Acciona Energia ANE.MC jumped 13% after media reports said global infrastructure funds were teaming up to bid for stakes in the Spanish renewable energy firm. Its parent, construction and energy conglomerate Acciona ANA.MC, also rose 10.4%.

Novo Nordisk NOVOb.CO added 1.7% after Britain's medicine regulator approved the drugmaker's weight-loss pill on Thursday, making the UK the first market in Europe where patients can access the oral treatment.

On the data front, German inflation eased slightly to 2.7% in May, while Britain's economy contracted by 0.1% in April.

Global investors kept a close eye on the U.S. market, where SpaceX's stock SPCX.O jumped over 20% in its Nasdaq debut on Friday, lifting its valuation to more than $2 trillion.