By Sanchayaita Roy, Sukriti Gupta and Pranav Kashyap

(Reuters) -European stocks stumbled on Monday, as investors nervously eyed the threat of Iranian retaliation following joint U.S.-Israeli strikes on Iran's nuclear sites over the weekend.

The pan-European STOXX 600 index closed 0.3% lower, after touching its lowest level in over a month earlier in the session.

Other major bourses also closed in the red, with Germany down 0.3%, France down 0.7%, Britain's FTSE down 0.2%, while Spain's was flat.

A Reuters report said that Iran could soon strike back at American forces in the Middle East, even as U.S. officials scramble for a diplomatic solution to avert conflict.

Tensions soared after U.S. warplanes joined Israel in bombing Iran's nuclear facilities over the weekend, prompting Iran to brand President Donald Trump a "gambler" for escalating the standoff.

With aerial assaults between Israel and Iran showing no sign of slowing, jittery markets braced for the possibility that Iran might retaliate by shutting the Strait of Hormuz—the world's most crucial oil passageway.

Investors rushed into safe-haven assets, driving up gold prices and eurozone bonds. Meanwhile, the utilities sector, often seen as a bond proxy, outperformed the STOXX 600 sectors.

Meanwhile, sources said that Germany will raise defence spending to 3.5% of economic output by 2029 funded through a nearly 400 billion euro borrowing programme.

Still, Europe's aerospace and defence stocks lost 0.7%.

The U.S. attacks on Iranian nuclear facilities could very well succeed in eliminating a nuclear capable Iran," said David Bahnsen, chief investment officer, The Bahnsen.

"There is still plenty of risk for short-term volatility driven by the uncertainty of the possibility of Iranian retaliation or a protracted conflict in the region."

Meanwhile, the July 8 U.S. tariff-pause deadline approaches with little progress on trade deals with Washington, with only a U.S.-UK formal deal reached.

On the data front, fresh data showed euro zone's economy flat lined for a second month in June, barely expanding, as the bloc's dominant services industry showed only a small sign of improvement and manufacturing displayed none at all.

Another survey showed British business activity expanded modestly in June.

The insurance sector lost 1%, dragged by a 4% drop in Munich RE after Morgan Stanley downgraded the stock to "underweight" from "equal weight".

A near 1% gain in technology stocks kept losses at check.

Heavyweight Novo Nordisk fell 5.3% after the Danish drugmaker presented full results from two late-stage trials of its experimental weight-loss drug CagriSema

Spectris rose 15.7% after private equity firm Advent said it will acquire the scientific instruments maker in a deal valued at 4.4 billion pounds ($5.91 billion).

Holcim gained 14% after the Swiss building materials company completed the spin-off of its North American business Amrize.

UCB gained 4.4% after Morgan Stanley upgraded the biopharmaceutical company to "overweight" from "equal-weight".

(Reporting by Sukriti Gupta and Sanchayaita Roy in Bengaluru; Editing by Sherry Jacob-Phillips, Shailesh Kuber and Tasim Zahid)