* FTSEurofirst 300 index falls 0.7 percent
* Poor German data, Cyprus troubles hurt sentiment
* Euro STOXX 50 consolidates, steep drop unlikely
By Atul Prakash
LONDON, March 21 (Reuters) - European shares dropped to a two-week closing low on Thursday, with investors taking more money off the table on poor German data and persistent worries over Cyprus.
The European Central Bank gave Cyprus until Monday to agree on a bailout or face losing emergency funds for its banks. Cyprus is struggling to craft an alternative plan to raise a 5.8-billion euro contribution in return for a 10 billion euro ($13 billion) bailout, without resorting to taxing bank deposits.
The FTSEurofirst 300 index ended 0.7 percent weaker at 1,190.72 points, the lowest close since March 7. The index, which hit a 4-1/2-year high last week, has fallen in 4 of past 5 sessions and heads for its worst weekly drop since November.
"There is a realisation that the situation in Europe is continuing to deteriorate. German PMI numbers were pretty shocking and Cyprus has now moved from economics to politics," David Scott, senior stock broker at Redmayne-Bentley, said.
"If the ECB does pull its liquidity, it's going to be another bad moment for the whole region. Cyprus is small but investors are concerned about the contagion effect."
A survey of 22 economists and bond strategists conducted by Reuters since Monday showed they see the proposed levy on deposits in Cyprus threatening the financial stability of other vulnerable euro zone countries.
Investors, already nervous over Cyprus, became more risk-averse when a survey showed Germany's business expansion lost steam in March, suggesting Europe's largest economy will post meagre growth this quarter.
Potentially bullish U.S. data also failed to cheer the markets. A downward trend in jobless claims, an increase in factory activity and a rise in sales of existing homes pointed to growing momentum in the U.S. economy, but European investors remained unimpressed.
The euro zone's blue chip Euro STOXX 50 index fell 0.9 percent to 2,683.92 points, with charts suggesting it could struggle to post a significant rebound in the near term.
"The consolidation phase is going to expand. We have got some good support areas, so the index is not going to face a whole lot of selling pressure, but it's going to drag on for weeks," Petra von Kerssenbrock, analyst at Commerzbank, said.
"It might take several attempts before we break to the upside. People are not taking big long positions before going on Easter holidays."
She saw the first support at a recent low of 2,660, and then at its 100-day moving average of 2,629. On the upside, the index could face resistance at the 10-day moving average of 2,710 and further at a recent high of 2,750.
Analysts said Cyprus's problems derailed a rally in equities, which were rising well and had potential to scale new highs as other external factors were quite supportive.
Some said a correction was warranted and could prove to be healthy for the market, which had moved too far, too fast in a short span of time.
Ian Richards, global head of equities strategy at Exane BNP Paribas, said the world economy was still moving in the right direction, liquidity support was huge and equity valuations were not frightening.
"To us, liquidity has proved the dominant driver of equity markets this cycle. We are reluctant to fight it now. We still see the directional bias upward."
He said a challenge might come when markets start to fear the impact of less central bank balance sheet support, potentially making the second half of the year far more difficult for markets than the current environment.
Among big movers, the chemicals sector fell 1.8 percent, pressured by a warning by Lanxess, the world's top synthetic-rubber maker, of a sharp earnings drop on anaemic demand from the auto industry. The auto sector, down 2.1 percent, fell the most.
After forming a double-trough reversal pattern in February and outpacing the broad market this week, the STOXX Europe 600 utility sector index rose 1.1 percent, with charts suggesting that one of Europe's biggest laggards in the past three months is gaining steam.