UPDATE 2-European shares drop as Washington and Tehran trade threats

European shares slipped on Monday as investors continued to trim risky bets amid escalating tensions between the United States and Iran, but shares of jeweller Pandora soared after it said it would meet 2019 sales targets. Iran vowed to avenge the killing of a top general by the United States, while U.S. President Donald Trump warned that Washington would strike back if Tehran retaliated.

The pan-European STOXX 600 index dropped 0.4%, well off its session lows but down for the second straight day. Bourses in Germany and Britain suffered the steepest losses in the region. "The likeliness is that this will not lead to war, and thus it is likely that the current market moves will be short-term in nature," said Joshua Mahony, senior market analyst at IG.

"However, markets will be highly responsive to any commentary and threats which are likely to maintain the current gains for havens such as gold and crude." The European oil and gas stock index closed at its highest level in nearly three months on the oil price rises.

All but two of the European sub-sectors were lower. The prospect of higher fuel costs hit airline stocks. British Airways' owner, Easyjet, Lufthansa and Ryanair all pulled the travel and leisure sector 1.2% lower.

German polymer maker Covestro AG slipped nearly 5% on reports of negative comments on the stock from brokers. Its shares pulled the chemicals index down 0.9%. Pandora jumped 12% after its preliminary results showed it would meet its 2019 sales and profit margin forecast, a sign that attempts to turn around the struggling jeweller could be starting to pay off.

The food and beverage index eked out a gain while telecoms and utilities outperformed the wider markets, indicating a preference for defensive plays.