European shares inch lower as China uncertainty continues to weigh

(Amends wording of headline)

* FTSEurofirst 300 index down 0.2 pct

* Mining, telecom stocks among top gainers

* Next (Other OTC: NXGPF - news) shares fall after trading update

* Euro STOXX 50 Volatility Index up 1.3 pct

By Danilo Masoni and Atul Prakash

MILAN/LONDON, Jan 5 (Reuters) - European shares edged lower on Tuesday, giving up earlier gains as uncertainty over China continued to weigh on sentiment, while gains among telecoms and miners provided some support.

The pan-European FTSEurofirst 300 index fell 0.2 percent by 1121 GMT after falling 2.5 percent on Monday, its biggest one-day drop since early December, following a 7 percent drop in Chinese markets.

European equities tried to bounce back in early deals following a stabilisation in China, a day after poor Chinese factory data triggered a global sell-off. But the rebound was short lived and volatility was rising with the Euro STOXX 50 Volatility Index up 1.3 percent.

"Short term uncertainty continues and stocks could reach new lows in the next few weeks, possibly creating some interesting buying opportunities," said Alessandro Allegri CEO of Italian asset manager Ambrosetti Asset Management.

"The main reason for the uncertainty is China given that company numbers and the macroeconomic picture in Europe and the U.S (Other OTC: UBGXF - news) . has not changed," he said, adding that weaker than expected inflation data in the euro zone did not help stocks.

Chinese regulators leapt to support the country's stock markets early on Tuesday, with the central bank pouring cash into the money market system and the securities regulator suggesting it might restrict share sales by major shareholders.

The securities regulator defended the functioning of the new "circuit breaker" policy that caused Chinese stock markets to suspend trade on Monday after markets fell 7 percent, triggering the mechanism on the very first day it came into effect.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen closed 0.3 percent higher on Tuesday.

Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets, said the market was getting some support from the telecom sector, which has seen several mergers and acquisitions.

"More deals are likely to come as companies look for synergies and cost efficiencies. This is an additional bonus for a relatively defensive sector in the current market environment."

Telecoms stocks outperformed, after telecom operator Orange (Taiwan OTC: 4554.TWO - news) confirmed it was in renewed preliminary talks about a merger with rival Bouygues Telecom. Bouygues (Other OTC: BOUYY - news) rose 0.9 percent, Altice (Other OTC: ATSVF - news) climbed 5.7 percent and Numericable surged 9.6 percent. Orange was also up 0.6 percent.

The STOXX Europe 600 Basic Resources index rose 1 percent, the top sectoral gainer, as prices of key industrial metals rose after slumping in the previous session.

However, British clothing retailer Next fell 5.4 percent after saying its sales performance in the run-up to Christmas was disappointing. It (Other OTC: ITGL - news) blamed unusually warm weather in November and December, poor stock availability and increased online competition. (Reporting by Danilo Masoni; Editing by Richard Balmforth)