Spain's main stock index rose sharply on Wednesday to nearly two-month highs, with markets awaiting a likely pause in U.S. interest rate hikes, in a session in which Grifols soared ahead of its plans to reduce its stake in a Chinese company.

After the moderate rise in US consumer prices in May, a larger-than-expected drop in producer prices reported on Wednesday only increased expectations that the Federal Reserve will decide to leave interest rates unchanged in a range of 5%-5.25%, given the signs of remission in inflation.

"Whether or not this is the end of rate hikes for this cycle, we and the Fed don't know yet," said Brad Bernstein, managing director at UBS Wealth Management.

"I think we'll have what's called an 'aggressive pause' today, where they'll talk about their concern about inflation, but at the same time they won't raise rates."

The Fed's Federal Open Market Committee will release its decision at 1800 GMT on Wednesday after the close of European markets, which will be followed by a press conference by its chairman, Jerome Powell.

Markets see a 95% chance that the Fed will keep rates at current levels, but discount a 25 basis point hike in July at almost 60% odds, according to CME's Fedwatch tool.

On Thursday it will be the turn of the European Central Bank, which markets expect to undertake another quarter-point rate hike.

As a result, Spain's Ibex-35 closed up 99.10 points on Wednesday, up 1.06%, to 9,432.80 points, its highest closing level since April 20, while the FTSE Eurofirst 300 index of large European stocks rose 0.44%.

In the banking sector, Santander rose 1.82%, BBVA gained 3.74%, Caixabank advanced 1.84%, Sabadell gained 2.15%, Bankinter gained 1.48%, and Unicaja Banco rose 0.86%.

Among the large non-financial stocks, Telefónica fell 0.36%, Inditex advanced 0.29%, Iberdrola gained 0.87%, Cellnex gained 0.03%, and the oil company Repsol lost 0.07%.

At the top, the plasma derivatives group Grifols, which advanced 6.78%, its biggest daily rise in a month to its highest closing level since March 27, after announcing its intention to reduce its stake in Shanghai RAAS in an operation that would bring it 1.5 billion dollars.

Grifols said it will remain a shareholder of the Chinese company, something that Diego Morin, an analyst at IG, noted that "has been taken as positive by the market, since it would help reduce its high debt, which rebounded according to its latest results, where free cash flow and gross margin fell, with a new increase in its debt ratio (9351 million euros)".

(Information by Dario Fernandez; additional information by Shristi Achar A and Sruthi Shankar)