European stock markets halted a four-session decline, with energy shares leading gains, while the prospect of the European Central Bank's first interest rate hike in nearly three years lifted banking stocks.

The Stoxx Europe 600 index closed 0.5% higher. Brent crude oil prices experienced sharp swings and rose above $93 per barrel after a warning from the U.S. President that the country would strike Iran "very hard" that night. The energy sector climbed almost 2%, marking its largest one-day advance in a month, while the banking sector gained 0.6%.

The European Central Bank, as widely anticipated, raised its key interest rate to 2.25% and cautioned that inflationary pressures had spread from the energy sector to a broader range of goods and services. The central bank also revised upwards its inflation forecasts for 2026 and 2027.

However, investors are divided on the future pace of ECB rate increases. Money markets currently price in two more rate hikes by year-end, but the ECB also downgraded its economic growth outlook as rising energy costs cloud the economic horizon.

The chief European economist at Deutsche Bank noted that while the ECB's move was a "significant moment," policymakers are unlikely to tighten policy much further.

Software stocks declined following a report showing weak software sales in Oracle's latest earnings. In contrast, chip-related stocks advanced as the same report indicated data center spending exceeded analyst expectations. ASML International NV shares rose more than 5%.