* FTSEurofirst 300 falls 2 pct, Euro STOXX 50 off 2.7 pct
* Volatility rises most since 2011 as investors buy protection
* Traders expect Ukraine resolution, uptrend to resume
By Francesco Canepa
LONDON, March 3 (Reuters) - Investors took fright at Russia's military intervention in neighbouring Ukraine on Monday, setting the pan-European FTSEurofirst 300 index on course for its second-biggest daily fall since June.
Companies exposed to the region, such as Austria's Raiffaisen Bank International, were among the top fallers.
"Investors had underestimated the risks of an escalation in Ukraine, so the events over the weekend are a wake-up call for the market," said David Thebault, head of quantitative sales trading at Global Equities in Paris.
Banks were among the top fallers, led by Raiffeisen, which has the largest exposure to Ukraine among European blue chips.
Companies with significant exposure to Russia, such as carmaker Renault and brewer Carlsberg, fell 5.9 percent and 5.4 percent.
The FTSEurofirst was down 2 percent at 1,320.97 points at 1514 GMT, its steepest fall since Jan. 24, when the index had also been pummelled by tensions in emerging countries.
The euro zone's blue-chip Euro STOXX 50 index retreated 2.7 percent to 3,064.34 points.
The cost of insuring against further swings in euro zone blue chips, as measured by the Euro STOXX volatility index , rose 27.6 percent, its biggest one-day rise since 2011, even though it remained at a relatively subdued level of around 21 points, compared to a 2013 peak of nearly 27.
"(Emerging) markets remain a major concern for investors and will undoubtedly be source of higher volatility for the European equity markets over the coming months," strategists at Societe Generale wrote in a note on Monday.
"We recommend protecting your European equity portfolio and even taking advantage of further volatility through derivatives."
Russian forces have taken control of Ukraine's Crimea region, which has an ethnic Russian majority. Ukraine has stepped up its own military preparations while the United States has threatened to isolate Russia economically.
"This could be a pretext for a 5 percent setback in the market," said Francois Savary, chief investment officer at Swiss bank Reyl. He said if the Euro STOXX 50 fell below the 3,000 level, it could represent a good entry point at which to buy into the index.
Savary and other investors expected an eventual political resolution to the Ukraine problems within the coming weeks, which they said should help equity markets maintain their upwards trend seen over the last year and a half.
A 50 percent rally since mid-2012 has left the MSCI Europe index trading at roughly 14 times its earnings, above its 10-year average, Datastream data showed.
Toby Campbell-Gray, head of trading at Tavira Securities, also expected a political resolution soon to the problems in Ukraine and said equity markets would continue to be supported by the fact that they offer better returns than the bond and cash markets.
"We will see a mark-down for a few days, but people still want to buy this market - there's nowhere else to put your money," he said.
All but seven stocks in the FTSEurofirst 300 were in negative territory, one of the broadest selloff on the index over the past year.
A calmer macro economic landscape over the past year and half has allowed investors to focus on the fundamentals of each company, bringing down stock correlation, a trend that many analysts expect to continue despite the recent, emerging market-related jitters.
"The 'risk-on, risk-off' phenomenon has become much less dominant since the end of 2012," Peter Rigg, chief executive officer of HSBC Alternative Investments, said.
"Current P/E multiples are above their 10 year average so individual company earnings growth is becoming a more relevant determinant of price moves than multiple expansion."