European shares were muted on Wednesday, as investors assessed developments in the U.S.-Iran negotiations, while defence group Rheinmetall dropped after a media report that Germany is set to scrap plans to build its biggest warship since World War Two.

The pan-European STOXX 600 index edged 0.02% higher to 634.78 points by 0816 GMT.

Among sectors, the aerospace & defence shares led declines, falling 1.3%, as German defence group Rheinmetall dropped 13.9%, heading for its biggest single-day drop since October 1998, after a report said the country would scrap plans to build the warship.

TKMS shares jumped 9.2% as the report said Germany intends to buy eight smaller frigates from the rival warship maker.

"You've got a very unstable environment and ongoing wars. That should feed into positive sentiment towards the defence sector, but it's not happening," said Michael Field, chief equity market strategist at Morningstar.

"NATO countries committed to a higher defence spend, but the midterms in U.S. are going to happen in November. It's very likely that the Democrats are going to retake the House, if not the Senate also. And then Donald Trump's ability to pressurize NATO countries into spending will wane."

The real estate sector limited declines on the STOXX 600, rising 2.3%, with Segro climbing 14.9% after U.S.-based Prologis took its $16.6 billion bid public as the UK warehouse landlord rejected it.

The tech sector rose 0.5% after posting its biggest single-day drop in nearly five months in the previous session, as memory stocks in Asia rebounded, with South Korean shares rallying 3.3%.

Chipmaker Infineon rose 1.4%, and chip-equipment suppliers BE Semiconductor and ASML added 0.9% and 1.4%, respectively.

The peace agreement between the U.S. and Iran has led to a fall in oil prices, with Brent crude trading at early-March levels on hopes that tankers stranded will move out of the Strait of Hormuz following a deal. However, caution prevailed amid disagreement on the key terms.

Investors awaited Germany's closely watched Ifo business climate survey, due later in the day, for fresh clues on the health of Europe's largest economy.

Traders were also watching for cues on the monetary policy path for major global central banks, as they priced in another 25 basis point rate hike by the European Central Bank by year-end, according to LSEG-compiled data.