UPDATE 2-European shares drop to seven-month low on geopolitical, rate jitters

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STOXX 600 hits 7-mth low, down 3.4% for the week

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L'Oreal shares slide after Q3 sales disappoint

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IHG falls on slower qtrly net unit growth

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UK retail sales fall more than expected

(Updated at 1600 GMT)

By Amruta Khandekar and Shristi Achar A

Oct 20 (Reuters) - European shares fell on Friday and posted their biggest weekly loss in seven months as concerns about a wider Middle East conflict, rising government bond yields and disappointing earnings reports kept higher-risk equities under pressure.

The pan-European STOXX 600 hit its lowest level in seven months, down 1.4%.

The index is down 3.4% for the week as fears around widening geopolitical tensions in Gaza fed into worries about disruption in oil supplies, with expectations of interest rates remaining elevated for longer further dampening the mood.

Rising government bond yields in Europe and in the U.S. have added to risk-averse sentiment, with central bank policy makers, including Federal Reserve Chair Jerome Powell, hinting at continued restrictive monetary policy.

Powell's comments drove the 10-year U.S. Treasury yield up to the 5% mark on Thursday.

"Geopolitics is driving investor sentiment at this point, around rising commodity prices and the potential for that to feed into inflation," said Richard Flax, chief investment officer at Moneyfarm.

Flax said the broader trend of rising risk premiums had made investors cautious towards risk assets.

Earnings from the region have done little to help sentiment, with analysts warning about further pressure on margins from rising energy prices and given the euro zone's exposure to China.

Swedish garden equipment maker Husqvarna lost 8.0% after third-quarter revenue missed expectations.

Miners led declines, down 3.4%, weighed down by a 7.2% drop in Boliden after a bigger-than-expected dive in third-quarter profit hurt by high costs.

The travel and leisure index shed 2.3%, with InterContinental Hotels Group down 4.5% after quarterly net growth slowed.

Financial stocks were also a big drag, with shares of UBS down 2.8%. The Swiss bank is set to overhaul the board of its domestic Swiss business after its takeover of Credit Suisse.

Tomra Systems sank 22.6% to the bottom of the STOXX 600 after missing third-quarter results estimates.

L'Oreal fell 1.5% after a larger-than-expected hit to its travel retail business in Asia.

Investors are bracing for a big week ahead with earnings in full swing and as the European Central Bank holds a monetary policy meeting.

Meanwhile, data showed British retail sales fell more than expected in September. (Reporting by Amruta Khandekar and Shristi Achar A; Editing by Sonia Cheema, Eileen Soreng and Jane Merriman)