UPDATE 2-European stocks in reverse as U.S.-China tensions spike

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* STOXX 600 down 0.9%, worst day in a month

* European earnings expected to worsen in Q2 before
improving

* Energy firms lead losses; BP, Total down over 3%

* UK's Melrose slumps after warning of jobs cuts

* Kingfisher posts best day in decades after results
(Updates to close)

By Sruthi Shankar and Susan Mathew

July 22 (Reuters) - European shares slid on Wednesday as
escalating U.S.-China tensions and a surge in coronavirus cases
dented sentiment after an EU-wide debt deal sent the region's
markets to four-month highs in the previous session.

Breaking a three-day winning streak, the pan-European STOXX
600 closed down 0.9% to post its sharpest one-day drop
in a month.

Beijing said Washington had abruptly told it to close its
consulate in the city of Houston, a move strongly condemned by
China. In response, the Asian country is considering closing the
U.S. consulate in Wuhan, a source said.

Energy stocks took the biggest hit, down 2.8% after
data showed a bigger-than-expected inventory build-up in the
United States, adding to the pressure on oil prices. Royal Dutch
Shell, BP and Total SA dropped more
than 3%.

U.S. President Donald Trump warned overnight the pandemic
would get worse before it got better, while a Reuters tally
showed global COVID-19 infections surged past 15 million on
Wednesday.

The news deflated the positive mood after European Union
members reached a deal on Tuesday over a 750-billion-euro
($864.68 billion) coronavirus recovery fund to help with the
bloc's economic recovery from the virus outbreak.

"Markets... swing between despair at the mounting number of
COVID-19 cases across the globe, and hope driven by financial
stimulus and developments on a potential vaccine," said AJ Bell
investment director Russ Mould.

Healthcare stocks marked their worst session in a
month, while China-sensitive basic material stocks lost
1.4%.

In earnings, UK home improvement chain Kingfisher
had its best day in more than three decades, up 14.6%, after it
forecast first-half underlying profit ahead of last year.

Swiss engineering firm ABB Ltd rose 2.8% after
saying its order situation could improve in the coming months.

Industrial group Melrose Industries, meanwhile,
dropped 14.2% after it signalled it could lay off an unspecified
number of employees following losses in the second quarter.

Automakers were hit by a 1.3% slide in French car
parts maker Valeo SA after it swung to a 1.2 billion
euros first-half loss.

Expectations for second-quarter corporate profits in Europe
have further deteriorated, Refinitiv data shows, as fears grow
over the extent of the recession triggered by the pandemic.

Companies listed on the STOXX 600 are expected to report a
decline of 58.6% in quarterly earnings, versus 56.2% forecast
the week before.
(Reporting by Sruthi Shankar in Bengaluru; Editing by Shounak
Dasgupta and Barbara Lewis)