* FTSEurofirst down 0.2 percent

* Cyprus tax vote causes volatility spike

* Cyprus stock exchange closed until Thursday

* Banks, insurers fall on debt contagion worries

* Miners retreat as big firms see slower growth in China

By David Brett

LONDON, March 19 (Reuters) - European shares fell on Tuesday with attention focussed on Cyprus's efforts to seal an international bailout with a controversial levy on bank deposits.

The island's Stock Exchange suspended trade on Tuesday and Wednesday while banks remained shut as its parliament looked ready to reject the tax, potentially taking it a step closer to a financial collapse.

By 0833 GMT, the FTSEurofirst 300 fell 0.2 percent to 1,197.95. It closed just 0.3 percent lower in the previous session after falling as much as 1.2 percent on fears the levy would spark bank runs in other struggling euro zone countries.

The sell-off caused a sharp spike in European volatility - a crude gauge of investor fear - although that settled down as investors took the opportunity to grab more shares in big European multinationals on the dips in a market underpinned by central bank support.

"The markets are currently still focusing on the fact that central banks will always be there to save the day, the relatively good economic data out of the U.S. and that there has been no major sell-off after the Italian election, so investors are still positioned for a risk-on environment," Andreas Hoefert, chief economist at UBS, said.

Euro zone finance ministers held an impromptu call on Monday to stress that the bank levy was a one-off and many analysts agree.

But they also worry that the developments in Cyprus are symbolic of a deeper lack of trust in policy in Europe and policymakers' need to make the private sector contribute more to bailouts. At some point that will see the market reposition itself, Hoefert said.

Banks and insurers - those financial institutions most exposed to Europe's debt crisis - each fell 0.4 percent on Tuesday.

Basic resource stocks - demand for which tends to reflect the outlook for the global economy - were the sharpest fallers, down 2 percent after Australia's big iron ore miners cautioned that China can no longer be counted on for unchecked opportunity, warning prices may fall.

RIO BEATS A RETREAT

Global miners Rio Tinto slid 3.2 percent and BHP Billiton fell 2.6 percent as Goldman Sachs reduced its iron ore price forecasts and cut its recommendations on the firms to "sell" and "neutral", respectively.

"In line with our forecast of falling iron ore prices, we see minimal free cash flow and significant earnings declines," said Goldman on Rio, adding the company to its convictions "sell" list.

On BHP, Goldman Sachs said its strong operations in other metals were supportive of the company's outlook but it still expects significant falls in earnings.

Precious metal miner Fresnillo also fell 3.6 percent as Deutsche Bank cut its rating to "sell" from "hold" on valuation grounds, saying Fresnillo the stock already prices in a near perfect delivery of its robust medium-term growth prospects.

Away from the miners, capital goods firm Weir shed 3.3 percent after Berenberg downgraded its recommendation to "hold" on valuation grounds.

And German steelmaker ThyssenKrupp fell 5.9 percent on a report it is preparing a capital increase that would dilute the holding of its biggest shareholder.

On the upside, German retailer Metro added 4.4 percent after UBS upgraded the company to "buy" saying it believe that the company's chief executive, Olaf Koch, would accelerate sales of some assets.

France's Iliad led the telecoms sector higher, rising 6.6 percent to be the top performer in Europe after it posted earnings which beat forecasts.