By Sukriti Gupta, Sanchayaita Roy and Pranav Kashyap

(Reuters) -European stocks closed at an over one-week high on Friday, fuelled by a rally in automakers, as investors took more risks on hopes for a truce in the U.S.-China trade spat.

The pan-European STOXX 600 index closed 1.1% higher, snapping a two-week losing streak and posting its first weekly gain in three.

German stocks notched their strongest weekly rally in two months, while France and Spain's main indexes clocked their best weeks in over a month.

The STOXX 600's energy sector, however, suffered its first weekly drop in weeks. The sector lost steam as oil prices plunged, after fears of a closure of the Strait of Hormuz — crucial to global supply — subsided following a 12-day conflict between Israel and Iran. [O/R]

"We are surprised to see continued market strength in light of the current geopolitical events, but it's clear that the market thinks the conflict will remain contained, although that could change at anytime," said Robert Ruggirello, chief investment officer, Brave Eagle Wealth Management.

With geopolitical worries in the Middle East receding, investors have shifted their gaze to global trade developments. They are hoping for breakthroughs on new trade deals before the looming deadline for higher U.S. tariffs in early July.

A White House official revealed on Thursday that Washington and Beijing had struck a deal to fast-track rare earth shipments to the U.S.

European auto stocks and the luxury sector, particularly sensitive to China-related headlines, jumped 4.1% and 2.5%, respectively, steering sectoral advances.

Porsche jumped 7.6% after Handelsblatt reported that the carmaker was looking to sell its consulting and IT services business MHP, which could be valued at over 1 billion euros ($1.17 billion).

Adding to the tailwinds, U.S. Treasury Secretary Scott Bessent on Thursday asked Republicans in Congress to remove a "retaliatory tax" proposal that would let Trump impose up to 20% taxes on foreign investors from countries that levy "unfair" taxes on U.S. firms.

Meanwhile, EU leaders discussed new proposals from the U.S. on a trade deal at a summit in Brussels on Thursday. European Commission President Ursula von der Leyen did not rule out the likelihood of tariff talks failing, saying "all options remain on the table".

"There's lots of negotiation going on and it takes time...but any sign that tensions are not going to re-escalate, would be taken positively," said Richard Flax, chief investment officer at Moneyfarm.

Global market sentiment also received an extra boost from Wall Street, as both the S&P 500 and Nasdaq opened at record highs. [.N]

On the data front, French consumer prices unexpectedly climbed in June, snapping a run of falling inflation, while Spain also saw its inflation rate tick higher during the month.

UK's JD Sports advanced 7.6%, while German sportswear makers Puma and Adidas gained 3% and 3.8%, respectively, after U.S. peer Nike's first-quarter revenue outlook exceeded market expectations.

Amplifon dropped 7.3% after brokerage Exane BNP Paribas flagged weak consumer sentiment in the hearing aid company's main markets.

(Reporting by Sukriti Gupta and Sanchayaita Roy in Bengaluru; Editing by Janane Venkatraman, Vijay Kishore and Shinjini Ganguli)