By Susan Mathew

(Reuters) -European shares fell on Tuesday, ahead of euro zone inflation data after a larger-than-expected rise in German consumer prices spurred bets of an aggressive central bank response.

Annual inflation in the euro region was seen hitting a record high of 7.7% in May, and investors now worried about a sustained rise in energy costs as Europe vowed to cut most Russian oil imports in retaliation to its invasion of Ukraine.

Germany’s DAX slipped 0.7%, while the region-wide STOXX 600 index dropped 0.5% by 0752 GMT, with volatility spiking as U.S. markets were set to open after a holiday.

“There is… speculation amongst market participants about a larger rate step in July. If today’s (euro zone) inflation data were to surprise on the upside, speculation of this nature is likely to be fuelled further,” Commerzbank analysts said.

Investors will closely watch for any change in the European Central Bank’s stance after its meeting next week. The central bank has so far signalled that it will begin its interest rate hiking cycle in July, with the rate seen rising to 0% or above by September.

Technology and real estate stocks stocks led losses, down more than 1.5% each.

On the month, STOXX 600 was set to end down over 1%, marking its fourth month in the red so far this year on concerns over central bank tightening, the Russia-Ukraine war fallout and impact from China’s tough COVID-19 curbs.

London’s FTSE outperformed with a 0.2% gain, powered by a 6.8% jump in consumer goods giant Unilever after it named activist investor Nelson Peltz to its board.

A rally in energy stocks boosted the index and capped losses in broader Europe as crude prices rose nearly 2% after EU’s Russian oil ban. [O/R]

Among other stocks, Dutch speciality chemicals maker DSM jumped 8.4% on plans to merge with Swiss peer Firmenich. DSM also announced the sale of its engineering materials subsidiary for 3.85 billion euros ($4.13 billion) to private equity firm Advent International and German chemicals company Lanxess

Lanxess surged 11%.

(Reporting by Susan Mathew in Bengaluru; Editing by Sriraj Kalluvila)