By Amruta Khandekar and Bansari Mayur Kamdar

(Reuters) -European shares advanced on Monday, supported by the energy sector, after a bruising selloff last week sparked by growing fears of a global recession as major central banks promised further interest rate hikes ahead.

The region-wide STOXX 600 index closed 0.3% higher, outperforming the slide in its U.S. peers.

Energy stocks jumped 1.7% to spearhead gains on the index, as oil prices were supported by the prospects of demand recovery in top consumer China. [O/R]

Ifo economist Klaus Wohlrabe said the likelihood of a recession in Germany has fallen with the release of a survey showing a stronger-than-expected rise in business morale in Europe’s largest economy in December.

Germany’s DAX advanced 0.4%.

“Maybe we’re a little bit too pessimistic about the impact of high energy prices on the European economy because we forget that companies and households adapt quickly to these high prices and find different ways of doing things,” said Edmund Shing, chief investment officer at BNP Paribas Wealth Management.

The STOXX 600 has lost 12.6% this year on fears of a recession after the European Central Bank (ECB), like other major central banks, embarked on its aggressive rate-hike campaign to stem a surge in prices partly driven by the Russia-Ukraine war.

Recent signs of easing inflationary pressures had offered hopes of central banks signalling an end to their monetary policy tightening, lifting equities off their October lows.

However, the previous week saw such expectations take a major setback, with the STOXX 600 logging its worst week since September after the European Central Bank and the Federal Reserve stuck to their hawkish monetary policy stance.

Data pointing to slowing economic activity in the euro zone and the U.S. has only added to the gloom, as hopes of a year-end rally fade.

“The central banks have destroyed our Santa rally this year,” said Claudia Panseri, head of equity strategy at UBS Global Wealth Management.

The ECB will hike interest rates further in the euro zone to combat high inflation, said ECB’s Vice-President Luis de Guindos.

Euro zone borrowing costs rose and spreads between core and peripheral bond yields widened as investors worried about a hawkish European Central Bank and increasing bond supply.

Rate-sensitive tech stocks fell 0.5% extending losses, after hitting an over one-month low in the previous session.

Among individual companies, Germany’s Volkswagen AG dropped 10.7% to the bottom of Europe’s STOXX 600.

Freenet AG rose 5.1% after Deutsche Bank raised its rating on the German-based telecom provider’s stock to “buy” from “hold.”

AstraZeneca slipped 0.4% after the drugmaker’s immunotherapy failed to meet the main goal in a study among patients with a type of lung cancer.

(Reporting by Amruta Khandekar and Bansari Mayur Kamdar; Editing by Savio D’Souza, Sherry Jacob-Phillips and Shailesh Kuber)

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