FRANKFURT, Sept 1 ― European stocks fell yesterday as a spike in inflation caused jitters about a possible shift in monetary policy, but nevertheless rose nearly 2 per cent in August on strong quarterly earnings and optimism over an economic recovery.

The pan-European STOXX 600 index closed 0.4 per cent lower, but marked a seventh straight month of gains in its best monthly winning streak since 2013.

Technology was the best performing sector in August, up 6 per cent on several strong earnings, while a rise in global Covid-19 cases also pushed investors into sectors most resilient to the pandemic.

Regional stocks had shed early gains yesterday after data showed inflation surged to a 10-year high in August, with further rises likely challenging the European Central Bank's (ECB) benign view on price growth.

Robert Holzmann, governor of Austria's central bank, also sent some shivers through the market when he called on the ECB to start tapering bond purchases.

Concerns about tapering, along with some month-end selling, pulled European stocks away from near record highs.

Basic resources stocks were the worst performers in August, down 4.2 per cent as wild swings in metal prices saw investors pull out of the sector, which has otherwise performed well through the year.

But strong earnings and a relatively high rate of vaccination have boosted European recovery hopes, while the US Federal Reserve's remarks last week reaffirmed views it was in no rush to tighten monetary policy.

"We're still riding the Powell wave,” said Craig Erlam, senior market analyst at OANDA.

"On the China side, it's worth noting that it's been priced in for a while. While the data is quite weak, the situation has evolved over the last couple of weeks,” Erlam said.

Meanwhile, data showed German unemployment fell more than expected in August.

The country's centre-left Social Democrats (SPD) extended their lead over Chancellor Angela Merkel's conservatives, according to a latest poll published on Monday, just weeks ahead of a general election.

Analysts expect European stocks to hold around current record levels for the rest of 2021, supported by stellar earnings, while worries around U.S. monetary policy tightening, German elections and a Chinese regulatory crackdown will cap gains.

Among stocks, Dutch technology investor Prosus NV rose 6.4 per cent after it said it had agreed to buy Indian payments platform BillDesk for US$4.7 billion (RM19.5 billion).

Travel and leisure stocks fell 0.7 per cent after European Union governments agreed to remove the United States from the EU's safe travel list. ― Reuters