European shares hit 1-week low on Iraq crisis, travel stocks suffer

Europe's top share index headed for a weekly drop after gaining for eight straight weeks, with escalating conflict in Iraq hitting travel stocks and the prospect of an early rate hike in the United Kingdom hurting property shares on Friday.

The pan-European FTSEurofirst 300 slipped to a one-week low, moving further away from this week's 6-1/2-year high. It was down 0.7 percent at 1,382.78 points by 1051 GMT after falling to a low of 1,381.86, the lowest since early June.

Travel and leisure stocks led the market lower, with the European sector index falling 2.3 percent after growing tensions in Iraq hit sentiment and boosted oil prices.

"The market was looking for an excuse to take profits after a rally to new highs and tensions in Iraq gave investors an opportunity to trim their positions," Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

"America may send a few fighter planes to help Iraq, but it doesn't look like the start of a new Iraq war. I don't see a sharp pull-back in the market. Shares could fall another 3 to 5 percent in the near term before bouncing back."

U.S. President Barack Obama threatened military strikes in Iraq against Sunni Islamist militants who have surged from the north to menace Baghdad and want to establish their own state in Iraq and Syria.

British Airways owner International Airlines Group, Germany's Lufthansa and budget airline firm easyJet , down 3.7 to 4.1 percent, were among the top decliners on the FTSEurofirst 300 index.

British property companies also came under selling pressure after Bank of England Governor Mark Carney said UK interest rates could rise sooner than financial markets expect and the bank would consider tackling housing market risks, including an undesirable loosening in mortgage underwriting standards.

British Land and Land Securities fell 3.6 percent and 3.5 percent respectively.

Analysts advised caution, which was also reflected in a rally in European volatility index, investors' main fear gauge and a measure to insure against future swings in shares. The index rose more than 9 percent after falling to a low not seen since December 2006 this week.

"I'd rather be short (European stocks) at the moment," Hobart Capital Markets broker Justin Haque said. "The market has lived in a blissful state but we're not short of warning signs: there's a war in Iraq and Carney wants to raise rates."

Europe bourses in 2014:

Asset performance in 2014:

Today's European research round-up (Additional reporting by Francesco Canepa; Editing by Toby Chopra)