Europe stocks slip after Boehner backs Syria action

* FTSEurofirst 300 down 0.4 pct after hitting 1-wk high

* Brewing Syrian tensions keep investors on edge

* Short squeeze sends Nokia (Stockholm: NOKI-SEK.ST - news) up 34 pct after unit sale

By Blaise Robinson

PARIS, Sept 3 (Reuters) - European stocks' week-long rally

paused on Tuesday, renewed worries over Syria overshadowing a 34

percent surge in Nokia after Microsoft (NasdaqGS: MSFT - news)

agreed to buy the Finnish firm's phone business.

The prospect of U.S. strikes against the Syrian regime was

back at the forefront of investors' minds after John Boehner,

the Republican speaker of the U.S. House of Representatives,

said he would support President Barack Obama's call for military

action and urged his colleagues in Congress to do the same.

Investors were also kept on edge after Israel (Other OTC: IRLCF - news) tested a

U.S.-backed missile system in the Mediterranean on Tuesday but

did not announce the launch in advance, prompting a flurry of

selling when Russia spotted the firing.

The FTSEurofirst 300 index of top European shares

closed 0.4 percent lower at 1,212.39 points after hitting a

one-week high earlier in the session.

Tech stocks rallied strongly following Nokia's deal, with

the firm's rivals in the telecom gear business, Alcatel (Paris: FR0000130007 - news) -Lucent

and Ericsson (Stockholm: ERIC-B.ST - news) , surging 9.2 percent and 5

percent respectively.

Nokia, once the world's dominant cellphone maker but largely

left behind in the smartphone revolution, said it will be

selling its handset business for 5.44 billion euros to

Microsoft.

The news sparked a massive short squeeze rally on Nokia's

shares - one of the most shorted stocks in Europe with 12

percent of shares out on loan - as hedge funds with negative

bets on the stock were caught off-guard by the deal and

scrambled to buy the shares back and close out loss-making

positions.

Hobart Capital director Justin Haque said the deal and the

ensuing spike in Nokia's share price would hammer hedge funds.

"It's going to be a long/short body bag job," he said.

The Nokia deal followed Verizon Communications' move

on Monday to buy Vodafone (LSE: VOD.L - news) out of their U.S. wireless

business for $130 billion, fuelling expectations of an M&A

revival that could support the market in the coming months.

"We are in an environment of growing merger fantasy for sure

as economic conditions are improving, companies are cash-rich

and interest rates are very low," Christian Stocker, equity

strategist at UniCredit (Milan: UCG.MI - news) in Munich, said. "I see more mega deals

taking place in the fourth quarter."

The FTSEurofirst 300 has gained nearly 2 percent since a low

last Wednesday, gains that were fuelled by M&A activity as well

as by worldwide factory data showing the global economic

recovery was on track.

On Tuesday, the Institute for Supply Management said its

index of U.S. national factory activity rose to 55.7 in August

from 55.4 the prior month, easily beating expectations for 54.

"Things are improving, especially in Europe, and the 'great

rotation' out of bonds and into equities is under way. For

long-term investors, this is an amazing opportunity to get

exposure to stocks," said Eric Galiegue, head of Valquant, a

Paris-based financial research firm.