* FTSEurofirst 300 down 0.9 percent
* Banks lead market lower on jitters over Cyprus
* M&S advances on report of Qatari bid interest
By Tricia Wright
LONDON, March 18 (Reuters) - European shares fell sharply on Monday, with markets rattled by a radical bailout plan for Cyprus which knocked confidence in European banks, though some investors saw the dips as a buying opportunity.
In a departure from previous EU practice that depositors' savings are sacrosanct, Cyprus and international lenders agreed at the weekend that savers in the island's outsized banking system would take a hit in return for the offer of 10 billion euros ($13.07 billion) in aid.
The FTSEurofirst 300 was down 0.9 percent at 1,192.01 by 0848 GMT, albeit clear of an earlier low of 1,187.98, led lower by a 2.2 percent drop in banking stocks - some of the strongest performers in recent months.
The Euro STOXX 50 Volatility Index, or VSTOXX, Europe's widely used measure of investor risk aversion, meanwhile, surged more than 20 percent.
The index rose as much as 24.4 percent to an intraday high of 19.57 - putting it on track for its second biggest daily rise since August 2011.
Fund managers and traders, however, reckoned the market selloff would be short-lived.
"The whole Cyprus situation feels to me like a storm in a tea cup and weakness should be bought. This is a message from Europe to Cyprus to stop misbehaving," said Lex van Dam, hedge fund manager at Hampstead Capital, which manages around $500 million in assets.
Atif Latif, director of trading at Guardian Stockbrokers, was of a similar mind: "(This) allows long-term investors to buy back into the market, for those that missed the initial rally,"
"Geopolitical risk was one of the areas we highlighted that would bring the market back to normalised levels. Now we have seen one example of this we do see things being weak for the open then start to push higher up throughout the week."
British retailer Marks & Spencer bucked the market, jumping 4.8 percent after a report of a Qatari bid interest, with trading volume in the stock already nearly 2-1/2 times its 90-day daily average.
The Sunday Times said the Qatar Investment Authority (QIA), the Gulf state's sovereign wealth fund, wanted to assemble a consortium to mount an 8 billion pound takeover of M&S.
The newspaper cited senior City sources as saying the QIA had approached several large private equity houses, including CVC Capital Partners, to gauge their interest in participating, and had spoken to lenders about financing an offer.
Qatar Holding, the investment arm of QIA, CVC and M&S all declined to comment on Sunday.
"From a tactical perspective, M&S is vulnerable to a bid, as trading and profits are under pressure, with nothing to show yet for the big investments made in online systems and warehousing and the changes in the clothing team," said independent retail analyst Nick Bubb.