European shares trim most losses on U.S. data, Yellen

* FTSEurofirst 300 index closes 0.2 percent lower

* Volatility index up 6.1 pct, indicates risk aversion

* Royal Bank of Scotland (LSE: RBS.L - news) falls after posting losses

By Atul Prakash

LONDON, Feb 27 (Reuters) - European equities pared most of their early losses late on Thursday, with better-than-expected U.S. durable goods data and comments from Federal Reserve Chair Janet Yellen prompting some investors to return to the market.

The FTSEurofirst 300 index, which fell 1.0 percent earlier in the day on poor company news and Ukraine tensions, ended 0.2 percent lower at 1,345.46 points. It was helped by data showing orders for U.S. manufactured goods excluding transportation unexpectedly rose last month.

Although Yellen's comments before a Senate Banking Committee did not indicate that the central bank could lower the pace of its stimulus reduction, investors felt some relief that there were no negative surprises, analysts said.

"Comments from Yellen indicate that there has been soft data recently in the U.S. and that has necessarily required consideration of reduced tapering. That does not mean that we expect the tapering to be changed, but her tone was distinctly dovish today," said Lorne Baring, managing director of B Capital Wealth Management in Geneva.

"Markets are showing some relief that monetary policy may remain loose and that the Fed is clearly taking a pragmatic view quarter by quarter."

Yellen said the central bank would be on alert to make sure recent signs of weakness in the U.S. economy were due to cold weather and storms, and not signals of a more fundamental slowdown.

Despite a late recovery in stocks, cyclicals remained under pressure, with insurance, media and autos down 0.6 to 0.7 percent on disappointing company news.

Royal Bank of Scotland slumped 8 percent after posting a loss, insurer Allianz dropped 2.3 percent following difficulties at its Pimco unit and troubled insurer RSA fell 4 percent after saying it will tap its shareholders for $1.29 billion of cash in a rights issue.

Investors' risk aversion was also highlighted by the Euro STOXX 50 Volatility index, Europe's widely used gauge of investor sentiment, which gained 6 percent.

"The markets had gone ahead of themselves and we may see investors taking some risk out of the table," said Thomas Malloch, investment manager at Redmayne Bentley.

"Any weakness is likely to be well-bought, as a good amount of capital is waiting on the sidelines to get invested into the market, but you need to be careful as valuations of many companies look stretched at the moment."

Political tensions in Ukraine also added to pessimism about emerging markets which hit equities in January and has dragged on the earnings of companies - such as luxury goods groups - exposed to those regions.

On Thursday, armed men seized the regional government headquarters and parliament in Ukraine's Crimea peninsula, a day after Russian President Vladimir Putin ordered military drills in western Russia near the countries' border.

"We're getting to the tail-end of results season, and many of the results have not been that great. It's also early days in Ukraine, but the situation over there is making people nervous," said Andrea Williams, European equities fund manager at Royal London Asset Management.

Some individual stocks were hurt by disappointing company news. Britain's WPP (Other OTC: WPPGF - news) fell 3.7 percent as fierce competition in the global advertising industry forced the company to lower its profit guidance for 2014, wiping more than a billion pounds off its share price.

On the positive side, British outsourcing company Capita (Frankfurt: A0MZ15 - news) rose 6.8 percent after posting a 14 percent rise in annual profits and saying was confident about its prospects in 2014.