European stock markets edged higher, extending gains after closing at a record high on Monday, as the prospect of the Strait of Hormuz reopening later this week bolstered investor risk appetite.

The Stoxx Europe 600 index closed up 0.2%, with bank and industrial stocks outperforming, while telecom and technology shares were the biggest laggards.

The benchmark index rose as the United States and Iran prepared to formally sign an interim peace agreement in Switzerland on Friday.

"We could see some 'buy the rumor, sell the news' action, especially given the situation still seems somewhat fragile and everything could still fall apart at the last minute," said Stephan Kemper, Chief Investment Strategist at BNP Paribas Wealth Management.

Oil prices were heading for their longest losing streak of the year, as the U.S.-Iran deal to reopen the Strait of Hormuz boosted expectations for a recovery in oil supply.

The European benchmark index closed at its first record high since the outbreak of the Iran war on Monday. However, due to its limited exposure to technology stocks, the index still lags behind other regional benchmarks.

"We see a bubble in AI, but for European equities to outperform again, that bubble needs to burst first," said Joachim Klement, Head of Strategy at Panmure Liberum.

In individual stock movements, Siegfried Holding AG fell 7.6% after UBS downgraded the Swiss pharmaceutical supplier from 'buy' to 'neutral', stating the company would experience "lower organic growth" again in 2026.