* FTSEurofirst 300 and Euro STOXX 50 fall more than 2 pct
* DAX down more than 3 pct, weak China data hits markets
* Fiat slumps after Ferrari spin-off
* Euro STOXX 50 Volatility Index rises
By Sudip Kar-Gupta
LONDON, Jan 4 (Reuters) - European shares fell sharply on Monday, the first trading day of 2016, as weak Chinese data weighed on world stock markets while a rebound in oil prices added to market volatility.
The pan-European FTSEurofirst 300 index fell 2.3 percent, its worst one-day drop since a 3.3 percent decline on Dec. 3.
The euro zone's blue-chip Euro STOXX 50 index also declined by 2.5 percent, while Germany's DAX slumped 3.4 percent.
China's factory activity contracted for the 10th straight month in December and at a sharper pace than in November, a private survey showed, dampening hopes that the world's second-largest economy would enter 2016 on a more stable footing.
The weak data caused Chinese and Asian shares to slump, with China's benchmark CSI300 share index tumbling 7 percent on Monday, prompting the stock exchange to halt trading on it.
Oil prices also rebounded up from previous lows as tensions escalated in the Middle East following Saudi Arabia's execution of a prominent Shi'ite cleric.
This, in turn, added to market volatility, with the Euro STOXX 50 Volatility Index gaining ground.
JP Morgan's equity strategist Mislav Matejka said that while he would stay "overweight" on euro zone equities, given signs of an economic recovery in the region, he was more cautious on equities on a more global level.
Matejka pointed to negative factors such as tensions in the credit market and a weakening in the U.S. stock market.
"We would look to use any strength as an opportunity to reduce equity allocation," said Matejka, who advocated selling out on any move up on the stock market given the risk that the market could soon fall back again.
Shares in carmaker Fiat Chrysler fell after the spin-off of its Ferrari division, while the weak China data also hit mining stocks since China is the world's biggest consumer of metals.
French conglomerate Bouygues outperformed to rise 1.3 percent after a media report that Orange was moving closer to buying Bouygues' telecoms arm for 10 billion euros ($10.9 billion).
Air France KLM shares also rose after Bank of America Merrill Lynch upgraded its rating on the stock to "buy".
Today's European research round-up (Editing by Keith Weir)