European stock indexes are mixed, pulling back slightly from recent gains, and oil prices have risen after new US strikes in southern Iran dampened investors' hopes a US-Iran peace deal could be imminent.
Market sentiment had turned more positive over the past week, as traders bet on a de-escalation in the US-Israel war on Iran, which has severely disrupted Middle East oil and gas supplies since it began in late February.
But traders re-adjusted this view on Tuesday after the US said on Monday it had carried out what it called defensive strikes in southern Iran.
As talks continue, US Secretary of State Marco Rubio said on Tuesday negotiating a deal with Iran could "take a few days".
The STOXX 600 was down 0.2 per cent on the day, but still close to its highest since the war began.
London's FTSE 100 was up 0.7 per cent on the day, while Germany's DAX was down 0.7 per cent. The MSCI World Equity Index was flat, but up 3.8 per cent so far this month.
Peter Schaffrik, global macro strategist at RBC Capital Markets, said that uncertainty in the Middle East was weighing on markets.
"It went from agreement is near to everyone needs to sign the Abraham Accords to bombing, so it's not entirely clear what's going on there," he said, referring to US President Donald Trump saying on Monday that he had told additional countries to sign the Abraham Accords, as he tried to negotiate an agreement to end the war with Iran.
Oil prices rose, with Brent Crude futures up 3.6 per cent on the day at $99.64 a barrel. US West Texas Intermediate was down 3.7 per cent from Friday's close, at $93.09. There was no WTI settlement on Monday due to the US Memorial Day holiday.
Still, there was some underlying optimism in the market, Schaffrik said, as traders held on to hope that the Strait of Hormuz could reopen to traffic soon.
Brent crude has come down significantly from its late-April peak above $120.
European traders were also weighing up comments by European Central Bank board member Isabel Schnabel, who told Reuters that the central bank should raise interest rates in June, even if ongoing peace talks with Iran yield a deal, as the conflict has been far longer than projected and high energy prices are spilling into the broader economy.
Money market traders are pricing in about a 90 per cent chance of a hike at the ECB's June meeting. European bond yields rose following the US strikes, but the benchmark 10-year German yield was still close to its lowest in almost seven weeks, at 2.9792 per cent.
Yields had fallen last week as investors became less concerned about the war's impact on inflation and growth. US government bonds rallied as investors were still hopeful about a deal to re-open the Strait of Hormuz.
The US dollar was steady, with the dollar index at 99.081 and the euro down less than 0.1 per cent on the day at $1.1636 .
The dollar was up 0.2 per cent against the Japanese yen, at 159.22 yen. Gold was down around 1.1 per cent on the day at $4,522.5.
