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French stocks drag European shares lower on political concerns

German share price index DAX graph is pictured at the stock exchange in Frankfurt

By Shubham Batra and Shristi Achar A

(Reuters) - European shares dropped for a third straight session on Tuesday, dragged down by weakness in French stocks as political uncertainties lingered, while investors analysed Federal Reserve Chair Jerome Powell's testimony.

The continent-wide STOXX 600 index ended 0.9% lower, its biggest daily percentage decline in nearly a month.

France's benchmark CAC 40 index underperformed the region's bourses with a 1.6% fall, as investors assessed the political situation following Sunday's legislative election.

Leaders from the left-wing bloc that came first in the election and the runner-up centrists have engaged in a race to be first to cobble together a viable government, lawmakers and other sources told Reuters on Tuesday.

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"You still have a very dysfunctional political situation, whereby the leading party also has very aggressive spending plans, even if it's not the party everybody was frightened was going to win," said Russ Mould, investment director at AJ Bell.

A 5.1% decline in Dassault Systemes was also a drag as the French software company cut its full-year earnings target, saying its customers were being cautious with spending and were delaying the signing of contracts.

The company dragged the technology sector 1.6% lower.

European equities have gained around 7% this year so far as investors remained sanguine about more rate cuts by the European Central Bank, but weakness among French stocks kept gains on the benchmark index in check.

Market participants also assessed Powell's remarks in his Congressional testimony, where he said inflation had been improving in recent months and that "more good data would strengthen" the case for looser monetary policy.

Money markets currently see a greater than 70% chance of a rate cut by the Fed in September.

The main focus will now be on U.S. and German consumer prices data on Thursday that will give direction to global monetary policy.

Meanwhile, ECB board member Fabio Panetta said the central bank can continue to gradually reduce interest rates without jeopardising a current fall in inflation.

Among other stocks, Indivior tumbled nearly 36%, the most among index peers, after it lowered its profit forecast for the year and said it would discontinue sales of its schizophrenia drug Perseris.

BP slid 4.2% after it said it expects lower realised refining margins and weak oil trading to hurt its second-quarter earnings. The stock dragged the oil and gas sector down 1.5%, among the biggest losers in the benchmark index.

(Reporting by Shubham Batra, Purvi Agarwal and Shristi Achar A in Bengaluru; Editing by Savio D'Souza and David Holmes)