UK Markets close in 7 hrs 37 mins

UPDATE 2-Oil, Fed nerves keep European shares grounded

By Sruthi Shankar

* Defensive sectors gain on STOXX 600

* Zalando falls after share placement by Kinnevik

* Fed decision on U.S. interest rates due on Wednesday (Updates to close)

By Sruthi Shankar

Sept 17 (Reuters) - European stocks closed marginally lower on Tuesday as energy shares gave up a chunk of Monday's big gains and banks lost steam ahead of a likely interest rate cut from the U.S. Federal Reserve.

The pan-European STOXX 600 index ended about 0.1% lower as investors sought refuge in defensive sectors such as consumer staples and healthcare after the weekend's attacks on Saudi Arabian oil facilities heightened geopolitical tensions.

Oil & gas sector dropped 0.8% after Reuters reported that Saudi Arabia's oil output will be fully restored quicker than expected, taking two or three weeks not months as initial indications suggested, according to sources.

The index notched its biggest percentage gain since January on Monday after the Saudi attack disrupted more than 5% of global oil supply.

Worries of an escalation in Middle East conflicts and the impact of a spike in oil prices on global growth cast a pall over investor sentiment.

"We continue to think that US-China trade tensions and the outlook for Fed policy remain more important drivers of oil prices," Capital Economics analysts wrote in a note.

"Nonetheless, we would not rule out entirely the possibility of an escalation in tensions, leading to an outright conflict in the Middle East."

While the Houthi group, which is fighting a Saudi-led coalition in Yemen, claimed responsibility for the attack, U.S. President Donald Trump blamed Iran. That accusation prompted Iran's supreme leader on Tuesday to rule out talks with Washington.

Investors were also on the fence ahead of the Fed's policy meeting, which concludes on Wednesday. The central bank is expected to cut interest rates for the second time this year to prop up slowing economic growth.

The European Central Bank last week cut rates deeper into negative territory and relaunched bond purchases with no scheduled end-date.

Banks slumped the most among the main European subsectors with a 2% drop and Italian banks also fell as much.

The healthcare, utilities, real estate and food and beverage indexes - commonly considered the defensive sectors - posted some of the biggest gains after taking a hit in recent weeks amid a turn to growth stocks.

The Swiss stock index, which includes many dividend-paying companies, gained about 0.5%.

Frankfurt-listed shares ended flat as data from the ZEW institute showed the mood among German investors improved more than expected in September, although warned that the outlook remained negative due to trade disputes and Brexit uncertainty.

Shares in Zalando slumped about 10% after a share placement by top investor Kinnevik in the e-commerce retailer. The broader retail index fell 0.6%.

Swedish garden equipment maker Husqvarna fell 4.3% after it stuck to an operating margin target starting from 2020 as it unveiled new financial goals.

British clothing retailer French Connection slid 13% after the company said it expects the sale process to be concluded by the end of the year, delaying it for the second time. (Reporting by Sruthi Shankar in Bengaluru, editing by Ed Osmond)