A fresh wave of selling hit European stock markets on Wednesday as little progress in the U.S. debt ceiling negotiations, a jump in UK core inflation and more losses in heavyweight luxury names hurt risk sentiment.

The Europe-wide STOXX 600 index fell 1.2% to hit a nearly three-week low, with all regional markets trading in the red.

Wall Street stocks finished sharply lower on Tuesday and short-term Treasury yields advanced as investor jitters grew over a lack of progress in the U.S. debt-limit talks.

Real estate stocks fell the most in Europe, down 2.1% as government bond yields jumped after UK inflation.

UK homebuilders led declines on the FTSE 100 after data showed a closely watched core measure of UK price growth surged to a 31-year high in April, cementing bets of more interest rate hikes from the Bank of England.

"Inflation is still very high across the euro zone and particularly the UK at the moment, and that is negative overall for consumers and businesses," said Michael Field, equity strategist at Morningstar.

"The problem is that when the market gets to this stage, it starts thinking of what you need for it to go up another leg. The market is searching for good news."

The benchmark STOXX 600 index hit an over one year high last week and the German DAX touched all-time highs as a strong earnings season and upbeat economic data offset worries about hawkish monetary policies.

Adding to the downbeat mood on Wednesday, a survey

showed

German business morale fell further than expected in May, mainly due to a sharp decline in future expectations, another sign that Europe's largest economy is facing stubborn economic headwinds.

Europe's luxury stocks fell 1.0% to a seven-week low as a selloff in the sector continued following a strong run this year that has been a key for positive returns across broader European markets.

"If you look at some of the share prices, they have run up massively over the last year or two. To some degree, it's the market saying how long more can that go on for or what are the stocks actually worth given the market conditions," said Morningstar's Field.

Embracer Group AB plummeted 44.2% to an all-time low after the Swedish gaming group said a major strategic partnership will not materialise and also trimmed its full-year adjusted EBIT forecast.

Vontobel Holding AG slipped 3.6% after the Swiss bank said its Chief Executive Officer Zeno Staub will step down. (Reporting by Sruthi Shankar in Bengaluru; Editing by Sherry Jacob-Phillips and Sonia Cheema)