By Sruthi Shankar and Shreyashi Sanyal

(Reuters) – European stocks rose on Monday, clinging to hopes of diplomatic efforts by Ukraine and Russia to end weeks-long conflict, while shares in Volkswagen surged after the German carmaker doubled its operating profit.

The pan-European STOXX 600 index ended 1.2% higher, extending gains from Friday when Russian President Vladimir Putin signalled a positive shift in talks with Ukraine.

Russia and Ukraine gave their most upbeat assessments following weekend negotiations, even as Russia attacked a base near the Polish border and fighting raged elsewhere.

“The initial fighting in Ukraine prompted an outbreak of risk aversion in markets, but for now the situation seems to have settled down, at least for markets,” said Chris Beauchamp, chief market analyst at online trading platform IG.

“Western intervention still looks highly unlikely, and for now negotiations continue … For now it looks like bullish sentiment will revive, but there are still plenty of unknowns to deal with.”

Auto stocks climbed 3.3% to lead gains among sectors. Volkswagen AG surged 4.4% as higher prices and a more favourable product mix boosted operating profit.

However, China-exposed miners, which have outperformed recently, fell 2.6%, as surging COVID-19 infections in the world’s top metals consumer fanned worries over economic growth prospects.

Shares of luxury brands such as LVMH and Richemont, which depend on China for a large part of their sales, also declined.

Investors waited for policy decisions from the U.S. Federal Reserve and the Bank of England later this week, with both the central banks expected to raise interest rates.

Banks gained 3.2%, extending a rebound from one-year lows hit last week as investors ramped up expectations of rate hikes to combat soaring inflation.

Hopes of progress in peace talks sent oil prices lower. Oil has surged this month after Western sanctions against Russia over its invasion of Ukraine raised concerns about supply disruptions. [O/R] [MET/L]

Telecom Italia climbed 5.0% after it said it would start formal talks with KKR to assess the U.S. fund’s potential 10.8 billion-euro ($11.8 billion) offer for Italy’s biggest phone group.

Dutch tech investor Prosus, which owns a stake in China’s Tencent, tumbled 10.4%, reflecting worries over regulation.

French power utility EDF slipped 0.1% after it warned on its 2022 profit outlook, while shares of Italian energy group Eni dropped 0.4% on the company’s agreement to sell a 49% stake in power generation unit Enipower to U.S. investment firm Sixth Street.

(Reporting by Sruthi Shankar and Shreyashi Sanyal in Bengaluru; Editing by Sriraj Kalluvila and Matthew Lewis)