* FTSEurofirst 300 falls 0.8 pct; hits three-month low
* Japan quake, unrest in Arab countries hurt sentiment
* For up-to-the-minute market news, click on [STXNEWS/EU]
By Atul Prakash
LONDON, March 11 (Reuters) - European shares dropped to a three-month low on Friday, with sentiment worsening after a massive quake in Japan and on growing unrest in the Arab world, though analysts said equities had potential to bounce back.
Appetite for risky assets such as equities fell, with the VDAX-NEW volatility index .V1XI hitting a three-month high.
Insurers were the biggest losers, with the sector index .SXIP down 2.2 percent as the quake raised fears of damage claims. Swiss Re RUKN.VX, Munich Re (MUVGn.DE) and Hannover Re (HNRGn.DE) fell 4.8 to 5.5 percent.
At 0946 GMT, the FTSEurofirst 300 .FTEU3 index of top European shares was down 0.8 percent at 1,122.91 points after touching 1,118.75, the lowest since early December. The index fell 1.1 percent on Thursday, while volumes were 26 percent of its 90-day daily average.
“Markets are in a correction mode. If you get natural disasters at a time when the markets are worried about something else, they can compound the worries,” said Bernard McAlinden, investment strategist at NCB Stockbrokers, in Dublin.
“But there is no reason to suggest that the stock market is going to collapse. The underlying tendency of the market is still to have net buyers. The net cyclical balance of these forces of interest rates and growth are still positive.”
The world’s fifth biggest earthquake on record hit Japan, triggering a 10-metre tsunami that swept away everything in its path, including houses and cars. The 8.9 magnitude quake caused many injuries and sparked fires. [ID:nL3E7EB0MF]
Investors traded cautiously as Chinese inflation data topped expectations in February and looked set to climb further, adding to pressure for further monetary tightening. [ID:nTOE72A01K]
“To our minds the food price inflation has been driven by weather related factors, as well the secular increase in food demand, and in the near term the food price inflation is likely to remain elevated,” said Gerard Lane, analyst at Shore Capital.
Goldman Sachs said that while 2010 earnings estimates for European companies were revised up strongly during the year, 2011 earnings estimates have only increased by 1.9 percent. It said consensus now expects earnings to grow by 15 percent.
“The market has continued to reward companies beating earnings estimates. We find that companies missing estimates were penalised less than during the previous season,” it said.
Investors also kept a close eye on the developments in Saudi Arabia and Libya. Saudi Arabia’s capital was quiet on a planned day of demonstrations. In Libya, forces loyal to Muammar Gaddafi entered the oil port of Ras Lanuf and were fighting for control of the town, rebels said.
Across Europe, Britain's FTSE 100 .FTSE fell 0.5 percent to 5,816.16 points. Charts showed the index fell below its medium-term uptrend and recent lows, indicating the FTSE has entered into a corrective phase. A further sharp decline would open the door to a test of the November lows at around 5,519.
Germany's DAX .GDAXI and France's CAC 40 .FCHI fell 1 percent and 0.9 percent respectively, while the Thomson Reuters Peripheral Eurozone Countries Index .TRXFLDPIPU fell 0.3 percent as focus remained on the peripheral euro zone countries.
Euro zone leaders are set to agree a “competitiveness pact” at a summit on Friday and will push Portugal to announce new reforms to increase market confidence as they seek to draw a line under the debt crisis. [ID:nLDE7292IM]
Among individual movers, K+S SDFG.DE fell 6.3 percent after BASF (BASFn.DE) announced late on Thursday it would sell its 10.3 percent stake in the potash miner. (Editing by Jon Loades-Carter)