Updates after close, adds analyst comments in paragraphs 8 and 11

By Avinash P and Niket Nishant

March 24 (Reuters) - European shares settled higher after a choppy session on Tuesday, as investors weighed hopes of de-escalation in the Middle East war against concerns of long-term economic harm.

The pan-European STOXX 600 .STOXX rose 0.4% to 579.28 points, after falling as much as 0.7% earlier in the session.

Telecom .SXKP and energy .SXEP stocks led the advance with gains of 2.5% and 2.4%, respectively. Defence shares .SXPARO fell 1.1%, while financials .SX7E slipped 0.7%.

Oil price-sensitive travel and leisure .SXTP sector, one of the hardest hit during the recent selloffs, inched 0.1% higher.

Markets have swung between gains and losses this week, whipsawed by rapid shifts in rhetoric between Washington and Tehran.

On Monday, U.S. President Donald Trump said Washington had already had "very, very strong talks" with Tehran more ​than three weeks into the war, but Iran has publicly denied this.

The Strait of Hormuz, which carries one-fifth of the global oil trade, has largely been shut since the war began. In recent days, energy infrastructure in the Middle East has come under attack as well, sparking a fresh bout of uncertainty.

"The baseline scenarios for energy price outcomes have shifted higher. The risks in either an escalation or de-escalation scenario are higher than before because the disruption has moved past the Strait to production," Morgan Stanley analysts wrote.

European economies rely heavily on oil imports and a sustained supply shock could push regional inflation higher.

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The impact of the war was seen in a survey that showed euro zone private sector growth slowed sharply in March. Similar surveys in Germany showed that the private sector grew at its weakest pace in three months, while France's contracted at its fastest pace since October.

"Dovish policymakers will use the data to argue for caution in tightening too quickly, too soon, but we think their pledges will fall on deaf ears as the inflation data roll in," said Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics.

Markets are pricing in at least two 25-basis-point rate hikes from the European Central Bank in 2026, a sharp contrast from before the conflict, when policymakers were expected to keep rates unchanged through the year.

Among individual stocks, Puig PUIGb.MC jumped 13% after Estee Lauder EL.N and the Spanish beauty group announced they were in talks regarding a potential merger.

Italy's largest mobile telecom towers company, INWIT INWT.MI, soared 9.9% on reports of a takeover bid.

On the flip side, Bellway BWY.L tumbled 17.5% after the homebuilder trimmed its operating margin outlook for fiscal 2026.

Software maker SAP SAPG.DE fell 4% after J.P. Morgan downgraded the stock to "neutral" from an "overweight" rating, dragging Germany's DAX index .GDAXI 0.1% lower.

(Reporting by Avinash P and Niket Nishant in Bengaluru; Editing by Eileen Soreng, Harikrishnan Nair and Sahal Muhammed)

((Avinash.P@thomsonreuters.com;))