* FTSEurofirst 300 down 1.1 pct, Euro STOXX 50 down 0.7 pct
* Surge in volatility index signals rise in risk aversion
By Blaise Robinson
PARIS, April 7 (Reuters) - European stocks dropped in early trading on Monday, halting a three-week rally and tracking a sell-off on Wall Street on Friday where a number of high-growth companies mostly in the tech and biotech sectors tumbled.
Losses were cushioned, however, as M&A activity in Europe fuelled hopes of some more consolidation.
At 0749 GMT, the FTSEurofirst 300 index of top European shares was down 1.1 percent at 1,338.20 points, slipping from a 5-1/2 year high hit on Friday.
The Nasdaq Composite sank 2.6 percent in New York (Frankfurt: HX6.F - news) on Friday as tech and biotech shares sank. The sell-off was not a surprise, said Aurel BGC chartist Gerard Sagnier, as following their recent rally, indexes have been stalled by long-term technical resistance levels.
"This could be the start of a 'profit taking' consolidation period. People should buy only when the pull-back is done, while it could also be time to hedge the portfolios," he said.
The Euro STOXX 50 Volatility index, known as the VSTOXX, jumped 10 percent on Monday, signalling a sharp rise in investor risk aversion.
The higher the VSTOXX - used to measure the cost of protecting stock holdings against market corrections as it usually moves in the opposite direction to cash equities - the lower investor appetite for risky assets such as stocks.
Despite the market's broad retreat on Monday, M&A fever helped boost a number of shares across Europe.
Switzerland's Holcim unveiled an all-share deal to buy France's Lafarge on Monday to create the world's biggest cement maker with combined sales of 32 billion euros ($44 billion).
Holcim shares were up 3.7 percent while Lafarge gained 3 percent, adding to their sharp rallies late on Friday after news emerged that the two were in merger talks.
Numericable jumped 16 percent on Monday after winning a fierce month-long bidding war against mobile rival Bouygues (Other OTC: BOUYF - news) for the prize of SFR, as Vivendi (TLO: VIV.TI - news) announced it had decided to go with Numericable's offer. Bouygues shares were down 6.2 percent.
"A modest rebound in M&A might certainly help support markets a little bit. I am not too optimistic about a full-fledged rebound in M&A because corporates overall are still very cautious. It will not be such a strong rebound what we have seen in the peaks of the last cycles," said Gerhard Schwarz, head of equity strategy at Baader Bank (Xetra: BWB.DE - news) .
Europe bourses in 2014: http://link.reuters.com/pap87v
Asset performance in 2014: http://link.reuters.com/gap87v
Today's European research round-up
(Additional reporting by Atul Prakash in London; Editing by Hugh Lawson)