UPDATE 2-European shares dip on pharma drag as Fed optimism sizzles out

European shares closed at a two-week low on Thursday weighed down by pharma stocks on worries that U.S. government may intervene on high drug prices, while optimism from the Federal Reserve's dovish stance faded away. The pan-European stocks benchmark rallied earlier in the day on remarks from Fed Chair Jerome Powell but reversed course in late afternoon trading to close 0.1% lower.

The White House announced that it was ditching its push for changes to the pharma rebate structure, providing some relief to health insurance companies but hurting drugmakers, including those in Europe. Novo Nordisk, UCB, Astrazeneca, and Roche all ended nearly 2% lower, dragging the pharma index down 0.7%, the biggest weight on the benchmark.

"Most drugmakers supported the initiative to eliminate rebates but now we see no solution to the challenges manufacturers face regarding growing rebates, " Morgan Stanley said in a note. "The lack of progress in Washington suggests that the industry will face ongoing political pressure, including legislative risk."

Also pressuring the sector was German medical imaging equipment maker Siemens Healthineers which slid 6% on worries about the performance of its Diagnostics business. Auto stocks ended 0.6% lower as a slew of warnings by small-cap auto/industrial suppliers hit large-cap car parts suppliers such as Valeo and Continental.

Bank of America Merrill Lynch warned in a note that depressed production for the sector across regions is unlikely to pick up materially in the near-term. Also weighing on sentiment was the International Monetary Fund's warning that the eurozone may see prolonged anemic growth, backing the European Central Bank's (ECB) plans for fresh stimulus.

Among bright spots, the energy sector gained the most as oil prices hit six-week highs, while banks outperformed pushing the bank-heavy Milan and Madrid indexes higher. Bucking the broader pharma trend, German drugmaker Gerresheimer AG rose 13% to the top of the STOXX 600 after confirming revenue guidance for the year and posting strong second-quarter results.

Despite the recent bout of losses, the STOXX 600 has recouped its May losses, gaining around 6% since then, mostly on expectations that major central banks will adopt a looser monetary policy.