Europe stocks drop again on Libya violence

At 0949 GMT, the FTSEurofirst 300 index of top European shares was down 0.8 percent at 1,161.87 points, after losing 1.3 percent on Monday.

The index, which hit a 29-month high on Friday, had gained nearly 6 percent since the beginning of 2011.

"We've had a pretty sharp rally so far this year, and the rising tensions in the Arab world has been used as an excuse to book some profits," said Jacques Henry, analyst at Louis Capital Markets in Paris.

"It's healthy for the market to take a breather after such strong gains, and as soon as the Libyan crisis eases, stocks should resume their rally."

Shares in airlines were among the biggest losers, hurt by fears over fuel costs as oil prices surged, as well as by concerns that the crises in the Arab world will hit travel.

Air France-KLM was down 3.3 percent, Lufthansa down 2.4 percent, and IAG, formed from the merger of British Airways and Iberia, down 3 percent.

"Enthusiastic investors had forgotten about risks in emerging and frontier markets. This is a wake-up call," a Paris-based trader said.

"There was almost no impact from the turmoil in Tunisia, but now it's a different game with Libya. The stakes are much bigger, and the risks for a number of companies such as ENI are huge. We just don't know where it's going to end."

Despite surging oil prices, energy shares took a beating on Tuesday on fears over their exposure to the troubled region. BP  fell 0.9 percent, Total was down 1 percent and Repsol down 1.7 percent.

Shares of Royal Dutch Shell, which said on Tuesday all its expatriate employees and their relatives in Libya had been relocated, was down 0.9 percent.

Trading on the Milan bourse was suspended on Tuesday for technical reasons, a day after the benchmark FTSE MIB index  sank 3.6 percent on worries over Italian companies' exposure to Libya.

Around Europe, the UK's FTSE 100 index was down 1.1 percent, Germany's DAX index down 0.6 percent, and France's CAC 40 down 1.4 percent.

The VDAX-NEW volatility index, a barometer of investor anxiety, gained 8 percent on Tuesday, hitting a six-week high as investors' risk appetite sharply dropped.