European shares climbed on Friday as investors overlooked an escalation in the conflict in the Middle East and cheered interest rate cut prospects from the European Central Bank (ECB), while shares of Airbus rose on record annual jet orders. The pan-European STOXX 600 was up 0.9% by 0934 GMT, after a 0.8% drop in the previous session. The index is also on track to eke out marginal weekly gains.

ECB President Christine Lagarde said on Thursday the "hardest and worst bit" regarding inflation was likely over and that interest rates would be cut if inflation falls to the 2% level.

Rate-sensitive real estate stocks rose 1.8%, leading sectoral gains, while technology index was up 1.2%.

Investors have priced in at least five rate cuts in 2024, with traders seeing about a 30% chance of the first move coming in March.

"There are expectations that inflation is heading in the right direction," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

"And Christine Lagarde's emphasis that we're over the hardest and worst in terms of inflation and the fact that we (have) really passed peak rates certainly has been encouraging."

Oil and gas shares added 1.3%, on a more than 2% rise in crude prices, following strikes carried out by the United States and Britain against Houthi military targets in Yemen, adding to fears of further escalation in the Middle East conflict.

"If there is this headache of potentially higher goods prices, that could start to raise inflationary concerns a bit. It very much depends on how long the situation continues for," Streeter added, referring to the escalations.

Meanwhile, French consumer price inflation (CPI) rose 4.1% year-on-year in December, largely due to higher energy and services prices, while Spain's annual inflation fell to 3.1% last month.

Among stocks, Airbus rose 2.5% after the planemaker reported record annual jet orders and confirmed an 11% rise in 2023 deliveries. The aerospace and defence index climbed 2.2%, hitting a record high.

Burberry shares declined 7.6% to the bottom of the STOXX 600 after the luxury retailer downgraded its guidance, citing a slowdown in luxury demand.

Other European luxury stocks also sagged, with LVMH down 1.0% and Christian Dior off 0.8%.

Shares in Adyen were up 3.7%, after Goldman Sachs raised their target price on the payment solutions firm. It was the best performer on the Dutch blue-chip AEX index, which gained 1.2%. (Reporting by Khushi Singh and Shristi Achar A; Editing by Mrigank Dhaniwala)