The lack of progress pushed oil prices higher, fueled inflation expectations, and supported the dollar, while investors awaited U.S. price data scheduled for release later today.
Markets have been trapped for days in a cycle of hope and despair amid the diplomatic impasse between Washington and Tehran.
The latest setback came when U.S. President Donald Trump stated that the ceasefire with Iran was 'in critical condition' after Tehran rejected a U.S. proposal to end the conflict.
The news spurred risk aversion across markets, although investors bet that neither side would be willing to escalate attacks, which helped limit the sell-off.
'It is clear that the positions of the U.S. and Iran remain far apart, with the former demanding the reopening of the Strait of Hormuz and the dismantling of the Iranian nuclear program, and the latter demanding the withdrawal of the American military presence as a prerequisite for any agreement,' brokerage Renta 4 said in its morning report.
'Furthermore, we reiterate that if the CIA report is accurate (suggesting Iran could withstand the U.S. naval blockade for at least another 3 or 4 months), Trump would be in a greater hurry than Iran to reach a deal, especially considering that gasoline is at 2022 highs and the American 'driving season' is now beginning. This period of peak demand could exert additional upward pressure on prices, complicating Trump's position ahead of the midterm elections (November 3),' these analysts added.
The truce in effect since April 7 had helped improve investor sentiment, but the absence of progress in negotiations is beginning to take its toll on certain market segments.
Rising energy costs, reflecting these geopolitical tensions, are fueling inflationary pressures and forcing investors to consider a 'higher-for-longer' interest rate scenario, resulting in a sustained rise in bond yields worldwide.
In this context, the release of U.S. inflation data at 1230 GMT will be the focus of traders' attention as they look for signs of the conflict's actual impact on prices.
Earlier, the German ZEW business confidence index for May (0900 GMT) could provide clues as to how much the war is weighing on the growth outlook for the German economy.
Against this backdrop, at 0705 GMT on Tuesday, the Spanish benchmark IBEX 35 was down 216.50 points, or 1.21%, at 17,636.00 points, while the pan-European FTSE Eurofirst 300 index retreated 1.21%.
In the banking sector, Santander lost 2.05%, BBVA fell 1.39%, Caixabank shed 1.63%, Sabadell dropped 1.16%, Bankinter declined 1.65%, and Unicaja Banco lost 1.38%.
Among non-financial heavyweights, Telefónica retreated 0.83%, Inditex shed 1.28%, Iberdrola fell 0.89%, Cellnex dropped 1.10%, and oil major Repsol rose 0.67%.
(Reporting by Tomás Cobos; editing by María Bayarri Cárdenas)
