By Sruthi Shankar and Shreyashi Sanyal
(Reuters) - European stocks dropped on Wednesday, with most investors on the sidelines ahead of the U.S. Federal Reserve's policy decision, while BMW shares jumped after the German carmaker forecast significant profit growth in 2021.
The pan-European STOXX 600 index fell 0.5%, trading below a one-year peak, with the utilities and basic resources sectors leading declines.
The Fed's policy stance will be watched after a recent run-up in Treasury yields stoked investor concerns about inflation picking up as the U.S. economy rebounds from the pandemic. The central bank's policy statement and economic forecasts are due at 2 p.m. EDT (1800 GMT).
"Investors prefer to stand on the sidelines ahead of one of the most anticipated FOMC meetings in the past few quarters," said Milan Cutkovic, market analyst at Axi.
"Fed Chair Powell will have a difficult time convincing markets that a rising inflation rate is not cause for concern, and that a rate hike is still at least two years away."
A move into some cheaply valued sectors such as banks and energy has pushed European stocks closer to record levels hit last year, with investors counting on vaccination drives and stimulus measures to spur a strong global rebound this year.
BMW rose 6.2% after it forecast a significant annual increase in pre-tax profit in 2021 with strong performance in all segments.
Europe's automobiles & parts index gained 3.3% to hit a 2018 high, with Volkswagen jumping 11.0% after it forecast 2021 deliveries, sales and earnings to exceed the previous year's level.
German airport operator Fraport added 0.6% after HSBC upgraded the stock to "buy", saying the pandemic has forced the company to become "better".
Austrian hydropower producer Verbund slid 7.9% as it expects 2021 profit to fall after a 14% rise in 2020, thanks to lower electricity prices.
(Reporting by Sruthi Shankar, Devik Jain and Shreyashi Sanyal in Bengaluru; Editing by Bernard Orr, Arun Koyyur and David Gregorio)