European stocks traded flat as investors adopted a cautious stance ahead of the Federal Reserve's expected rate cut later this week, while also digesting hawkish signals from the European Central Bank.

The Stoxx Europe 600 index closed slightly lower by 0.1%, with banking and industrial sectors leading gains while real estate lagged.

Among individual stocks, Avino Silver & Gold Mines (ASM) rose 6.9% after Morgan Stanley named the chip equipment maker a top pick and raised its earnings forecast. Separately, Magnum, the ice cream business spun off from Unilever PLC (UL), debuted slightly above its technical reference price. The spin-off aims to provide the world's largest ice cream company a platform to revitalize performance as an independent entity.

The Fed's decision will "set the tone for the first half of the week," said Geoff Yu, senior macro strategist at BNY Mellon, adding, "At least on inflation, the U.S. appears to be on a different path than most other countries, which will impact asset allocation."

The benchmark index remains less than 1% below its November record high, as expectations of further U.S. rate cuts overshadowed concerns over inflated AI stock valuations. Markets now price in over a 90% probability of a Fed rate cut.

This contrasts sharply with investor expectations for the ECB's rate path. Executive Board member Isabel Schnabel welcomed market bets that the central bank's next move could be a hike, noting that current borrowing costs remain appropriate for some time.