Developments in the Middle East remained the primary concern, fueling inflationary fears and raising expectations for interest rate hikes by central banks worldwide this year.
A drone attack caused a fire at a nuclear power plant in the United Arab Emirates, while Saudi Arabia reported intercepting three other unmanned aircraft. Meanwhile, U.S. President Donald Trump warned Iran that it must act 'quickly' to reach an agreement.
The strategic Strait of Hormuz remained virtually closed to maritime traffic as Tehran attempted to formalize its control over a waterway that normally handles 20% of the global oil trade.
Investors fear that crude prices will remain elevated for an extended period, triggering a sharp rise in global inflation and potentially a recession.
Brent crude rose 1.9% to 111.34 dollars per barrel, while U.S. crude advanced 2.2% to 107.72 dollars.
G7 finance ministers are scheduled to meet this Monday in Paris to address the situation in the Strait of Hormuz and the supply of critical raw materials, although geopolitical rifts within the group threaten to hinder a coordinated response.
The situation had a direct impact on debt markets, where selling intensified and bond yields continued to climb, with Japanese yields reaching highs not seen since 1996.
Adding to the adverse outlook were disappointing macroeconomic data from China. Growth in the world's second-largest economy lost momentum in April, with industrial production slowing and retail sales falling to their lowest levels in over three years, amid higher energy costs stemming from the Iran conflict and inconsistent domestic demand.
Nevertheless, the analysis department at Bankinter noted that 'the risk of inflation and higher rates resulting from more expensive oil due to the Iran/Hormuz war will only translate into limited damage to the economic cycle, within a context of excellent corporate earnings'.
These analysts believe that last week's meeting between the leaders of the United States and China reduced geopolitical risk, given Beijing's rejection of Iran possessing nuclear weapons and Washington's approval of certain technology transfers to China.
'But perhaps most importantly from a geostrategic perspective,' Bankinter added, 'is that China is not making any effective gestures of support for Iran (nor, of course, for Venezuela), which indicates that the China/Russia/North Korea/Iran/Venezuela bloc is fracturing. And if that is the case, the challenge to American hegemony is notably weakened.'
On the corporate front, the week's focus will center on Nvidia's results, scheduled for Wednesday, which will test the artificial intelligence euphoria that has underpinned the recent rally in the tech sector.
U.S. retail companies will also publish their figures, most notably Walmart, whose results will serve to gauge the health of the consumer in a high-energy-price environment.
At 0701 GMT on Monday, the Spanish benchmark IBEX 35 was down 119.00 points, or 0.68%, at 17,501.90 points, while the FTSE Eurofirst 300 index of leading European shares retreated 0.69%.
In the banking sector, Santander lost 0.67%, BBVA fell 0.45%, Caixabank slipped 0.05%, Sabadell dropped 0.24%, Bankinter shed 0.47%, and Unicaja Banco lost 0.29%.
Among non-financial heavyweights, Telefónica edged down 0.03%, Inditex shed 1.37%, Iberdrola lost 0.47%, Cellnex fell 0.50%, and the oil company Repsol rose 1.73%, capitalizing on the surge in crude prices.
(Reporting by Tomás Cobos; editing by Jorge Ollero Castela)
