European shares fall awaiting Cyprus tax vote
* FTSEurofirst 300 down 0.2 percent
* Cyprus closed awaiting vote on tax deal
* Banks slide as euro zone debt worries reignite
* Miners fall on waning China demand
* Iliad lead telcos higher on forecast beat
By David Brett
LONDON, March 19 (Reuters) - European shares fell in choppy trade by midday on Tuesday as investors tried to hold their nerve after Cyprus's bailout package stoked anxiety about the euro zone's debt crisis.
The island's stock exchange suspended trade on Tuesday and Wednesday and banks remained shut as its parliament looked ready to reject the unprecedented levy on bank accounts, heightening the risk of an eventual financial collapse.
"It is worrying that the senior members of the euro zone and International Monetary Fund cannot see the huge risks of destroying euro zone guarantees ... All the good work over the last six months to stabilise the fund flows from the periphery has just been nuked," said Lee Robinson, director of Altana Distressed Assets Fund.
Markets, however, were relatively calm. By 1118 GMT, the FTSEurofirst had shed 0.2 percent to 1,197.19, while the euro zone blue chip index fell further, down 0.5 percent to 2,692.19.
Investment banks such as Citigroup and Credit Suisse saw limited risk of the Cyprus events triggering wider selloffs, although others predict heightened selling pressure and a surge in "risk-off" trades if Cyprus does not pass the deal.
While the current calm was reflected in the peripheral bond markets where yields remained relatively unchanged, other areas of the market were emitting warning signs.
Volatility - a crude gauge of investor fear - on equity markets has spiked 22 percent since Friday, albeit from multi-year lows.
"All the sell-side banks are saying this is not a huge game changer, but they are conflicted (given their exposure to Europe) and cannot say anything else," Altana's Robinson said.
The unprecedented support from central banks for the financial system continues to deter stock markets at multi-year highs from retreating further.
"The markets are still focusing on the belief that central banks will always be there to save the day," Andreas Hoefert, chief economist at UBS.
He said, however, that the developments in Cyprus are symbolic of a deeper lack of trust in policy in Europe, which could eventually trigger a repositioning among investors.
Banks and insurers - those financial institutions most exposed to Europe's debt crisis - each fell 0.4 percent on Tuesday, while the euro zone banking sector has shed 3.7 percent so far this week.
The broad, sharp sell-off in European banks, however, could create buying opportunities, with Espirito Santo highlighting Barclays, BNP Paribas and Societe Generale .
Basic resource stocks - demand for which tends to reflect the outlook for the global economy - were the sharpest fallers, down 2 percent after Australia's big iron ore miners cautioned that China can no longer be counted on for unchecked opportunity, warning prices may fall.
Global miner Rio Tinto slid 3.2 percent and BHP Billiton fell 2.6 percent as Goldman Sachs reduced its iron ore price forecasts and cut its recommendations on the firms to "sell" and "neutral", respectively, on earnings concerns.
Precious metal miner Fresnillo also fell 3.6 percent as Deutsche Bank cut its rating to "sell" from "hold" on valuation grounds, saying the stock already prices in a near perfect delivery of its robust medium-term growth prospects.
Away from the miners, capital goods firm Weir shed 3.3 percent after Berenberg downgraded its recommendation to "hold" also on valuation grounds.
German steelmaker ThyssenKrupp fell 5.9 percent on a report it is preparing a capital increase that would dilute the holding of its biggest shareholder.
Chip designer ARM Holding slipped 2.8 percent after announcing its chief executive Warren East is stepping down after nearly 12 years in the role.
On the upside, France's Iliad led the telecoms sector higher, rising 6.6 percent to be the top performer in Europe after its earnings beat forecasts.
German retailer Metro added 4.4 percent after UBS upgraded the company to "buy" saying it thought the company's chief executive, Olaf Koch, would accelerate sales of some assets.
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