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Oct 20 Reuters European shares fell on Friday and were set to post their biggest weekly loss in three months as mounting fears about a wider Middle East conflict, surging government bond yields, and underwhelming earnings reports kept investors riskaverse.

The panEuropean STOXX 600 hit its lowest level in seven months and was last down 0.6 by 0824 GMT, tracking a weak finish on Wall Street overnight.

The index is down nearly 3 for the week as concerns that the conflict in Gaza could spread in the Middle East and expectations of higherforlonger interest rates further dented investor sentiment.

Federal Reserve Chair Jerome Powell on Thursday said U.S. economic strength could require still tougher borrowing conditions, driving up longerdated Treasury yields to the 5 mark.

As bond yields jump upwards, the opportunity cost of investing in the stock market also increases, making equities a less attractive option, said Sophie LundYates, lead equity analyst at Hargreaves Lansdown in a note.

That39;s a leading cause of the market malaise seen in recent trading sessions, and is likely to continue until the Treasury trajectory is back on less jumpy ground.

Earnings from the region have done little to help sentiment, with analysts warning about further pressure on margins from rising energy…