By  Avinash P

(Reuters) - European shares extended their declines on Friday and were headed for a second consecutive weekly ‌loss, as escalating conflict in the Middle East and inflation worries dented risk appetite.

The pan-European benchmark STOXX 600 (.STOXX) was down 0.5% at 596 points by 0924 GMT, with all regional indexes in the red. All major regional bourses were also set to log ​weekly declines.

Economically sensitive banks (.SX7P) led sectoral losses with a 1.9% fall. Standard Chartered (STAN.L) and HSBC (HSBA.L), the ​two global banks most exposed to the war with Iran according to Reuters analysis, extended their ⁠monthly declines to 13% and 14%, respectively.

Conversely, the energy (.SXEP) sector inched 0.5% higher and by far the ​best weekly performer. Oil giants BP (BP.L) and Shell (SHEL.L) both added above 1.5% as crude prices traded above $100 a barrel.

Global ​markets extended their declines this week as the U.S.-Israel war on Iran approached the two-week mark with heavy exchanges of drone and missile strikes across the region.

Markets are bracing for a drawn-out conflict, with Trump escalating rhetoric against Iran, and Tehran pledging to keep ​the Strait of Hormuz shut, fuelling concerns over energy-driven inflation and pushing traders to rein in rate-cut bets.

"Some ​of that is colored by relatively recent experience of central bankers thinking that inflation was transitory and having it be both ‌higher and ⁠longer than they might have feared. So investors are pricing in that...a little bit more than we did four or five years ago", said Richard Flax, chief investment officer at Moneyfarm.

Markets have priced in one quarter-point rate hike by the ECB by the end of the year and see nearly 75% chance of another similar-sized move, ​as per LSEG data. This ​contrasts with earlier this ⁠year, when traders expected lower rates as European policymakers were worried the inflation in the region was undershooting the ECB's target.

On the macro front, inflation in France rose 1.1% ​year-on-year in February, data showed, while the British economy grew by 0.2% in the ​three months to ⁠January, below expectations.

Attention also turns to industrial production data in the eurozone, which is due later in the day.

Among individual moves, BE Semiconductor Industries (BESI.AS) shares jumped 10.8% after the chip-equipment maker fielded takeover interest, Reuters reported.

Berkeley Group (BKGH.L) cautioned that the conflict ⁠in the ​Middle East was weighing on risk sentiment, while reaffirming its annual ​profit outlook, sending shares of the home builder 4% down.

Zalando (ZALG.DE) climbed 6% after Bernstein upgraded the online fashion retailer to market perform from ​underperform, adding to a 9.5% gain in the previous session.

Reporting by Avinash P in Bengaluru; Editing by Vijay Kishore

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