A man walks down steps under a share price ticker at the London Stock Exchange in the City of London. The FTSE 100 lost 0.3% yesterday.

Dow Jones/London

European shares fell yesterday amid concerns over the escalating conflict in Iraq, which continued to boost oil prices.

The Stoxx Europe 600 index closed 0.5% lower, with renewed tensions in Ukraine adding to the downbeat tone.

The radical militia that has plunged Iraq into chaos claimed on Sunday that it had executed hundreds of Iraqi soldiers, even as the Obama administration said it is preparing to open direct talks with Iran on how to counter the insurgents.

The price of a barrel of Brent crude oil climbed 0.5% to $113.02, not far short of last week’s high for the year. The yen, which tends to rise in times of stress, climbed against the dollar to ¥101.79 while gold added 0.1% to hit $1,275.8 an ounce. Earlier in the day it was up more than half a%.

Higher energy prices could quicken inflation at a time when investors are already starting to worry about the possibility central banks could begin to tighten monetary policy.

Bank of England governor Mark Carney said last Thursday that rates in the UK could rise sooner than investors expect, boosting the pound and putting UK stocks and bonds under pressure.

“There is a possibly inflationary impact of a higher oil price. It is a difficult cocktail for the market to digest when [equity] valuations are looking expensive,” said Guy Foster, head of portfolio strategy at Brewin Dolphin, which manages £26bn ($44.1bn) of assets.

Federal Reserve boss Janet Yellen tomorrow will give the latest indication on the path of US monetary policy.

“It looks like it is going to be a difficult week. Nobody is going to want to be long going into Yellen’s news conference on Wednesday,” Foster said.

Events in Ukraine added to investors’ concerns, too.

Russian state gas giant Gazprom said yesterday it will only ship fuel to Ukraine if it pays in advance, making good on a threat that could lead to supply cuts affecting European customers after late-night talks on debt repayment failed to yield a deal.

All major European indexes closed lower, with London’s FTSE 100 losing 0.3%, in line with Germany’s DAX. France’s CAC-40 dropped 0.7%.

Those losses were mirrored in the US too, where the positive impact of manufacturing data was outweighed by the violence in Iraq. The Dow Jones Industrial Average shed 0.2% in late European trade, while the S&P 500 slipped 0.1%.

Earlier in the session, data showed that industrial production rose a seasonally adjusted 0.6% from April in May, a sign that growth in the critical manufacturing sector is back on track following a harsh winter.

In currency markets, sterling traded above $1.70 against the dollar for the first time since 2009, as expectations continued to build that the Bank of England will raise interest rates later this year following Carney’s comments last week. Forwards markets are now pricing in a rate increase in the final quarter of 2014.

The pound also climbed to a fresh 18-month high of 0.7965 to the euro.