European shares fall, Greek weekend debt talks prompt caution

* FTSEurofirst 300 down 0.6 pct, Euro STOXX 50 down 0.7 pct

* Volatility rises, protection sought ahead of Greek talks

* K+S surges after Potash offer, supports DAX

* Tesco (Xetra: 852647 - news) top FTSEurofirst gainer after sales beat forecasts

By Alistair Smout

LONDON, June 26 (Reuters) - European stocks fell on Friday, with investors discouraged by a lack of progress in Greek debt crisis negotiations heading into crunch talks at the weekend.

Greece failed again to clinch a deal with its international creditors on Thursday, setting up a last-ditch effort on Saturday to avert a default next week.

The pan-European FTSEurofirst 300 index was down 0.6 percent at 1,563.40 points by 0751 GMT. The euro zone Euro STOXX 50 was down 0.7 percent, while Greek shares fell 1.4 percent.

The VSTOXX, a volatility measure that is a crude measure of investor fear, rose 1.4 points to its highest level since Monday.

A rally this week has left the FTSEurofirst 300 up 2.2 percent for the week, as optimism had built that a deal may be found.

While an agreement on Saturday is possible, traders said the high amount of uncertainty ahead of the negotiations made investors unwilling to leave themselves exposed heading into the weekend.

"I think most people believe some sort of deal will be found, but coming into the weekend, when we're already overheated, why take on the extra risk over the weekend?" Mike McCudden, head of retail derivatives at Interactive Investor, said.

"Generally investors will be avoiding equity because of the event risk over the Greek situation."

Euro zone banks fell 0.7 percent, while France's CAC , Spain's IBEX and Italy's FTSE MIB dropped 0.7-0.9 percent.

Germany's DAX outperformed slightly, down only 0.6 percent despite only having one stock in positive territory, K+S .

The potash producer rallied 31 percent after it said it has received a takeover proposal from larger Canadian fertiliser producer Potash Corp of Saskatchewan Inc.

Sources said the offer was just over 40 euros a share. The rally took it to 38 euros, and added 21 points to the DAX.

Britain's biggest supermarket Tesco was the biggest riser on the FTSEurofirst 300, up 3.5 percent after it said it saw signs of an improvement in core markets and reported a better expected performance, even as sales still declined.

"(It's a) strong set of numbers and they're starting to see evidence of stabilisation," Atif Latif, director of trading at Guardian Stockbrokers, said.

"Margin pressures should ease into the latter part of the year and with asset sales, it's still a distinct possibility that they could avoid the need for a rights issue."

Europe bourses in 2015: http://link.reuters.com/pap87v

Asset performance in 2015: http://link.reuters.com/gap87v

Today's European research round-up

(Editing by Alison Williams)