European shares fell on Thursday, with a pan-European index slipping from a near two-year high hit earlier in the day, as comments from Swatch's CEO on the outlook for Swiss watch exports hurt luxury shares.

A number of traders also mentioned market talk of a significant move in the derivatives market as the reason behind the late-session selloff.

The FTSEurofirst 300 index of top European shares closed 0.3 per cent lower at 1,164.65 points, after rising to as high as 1,170.29 points earlier in the session, a level not seen since March 2011.

Swatch CEO Nick Hayek said he expected Swiss watch exports as a whole to grow 5-7 per cent in 2013, down from the 12.6 per cent growth recorded for the 11 months up to November 2012.

Shares in LVMH, the world's biggest maker of luxury goods, lost 1.1 per cent, Hermes fell 1.8 per cent, Richemont dropped 2.1 per cent and Swatch fell 0.8 per cent.

"These are the stocks that have shown resilience during the eurozone debt crisis, and people are now keen to book profits on these and switch to recent losers that offer more upside," a Paris-based trader said.

The eurozone's blue chip Euro STOXX 50 index inched up, closing 0.07 per cent higher at 2,708.27 points, but failed to close above a major resistance level at 2,709, which represents the starting point of a 30 per cent nosedive in mid-2011.

The benchmark's chart shows a bullish 'flag' pattern shaping up over the past week, and a clear break above the flag, or above 2,709, could send the index rallying sharply.

Southern Europe rally

Around Europe, UK's FTSE 100 index gained 0.05 per cent, Germany's DAX index lost 0.2 per cent and France's CAC 40 dropped 0.4 per cent.

Southern European markets bucked the trend, extending their new-year rally, with Spain's IBEX up 0.2 per cent, Italy's FTSE MIB up 0.7 per cent and Portugal's PSI20 up 1.3 per cent.

The Euro STOXX 50 has surged 12 per cent since mid-November, outperforming US stock indexes, as abating worries over the outlook for the eurozone prompted investors to increase their exposure to European stocks.

"Finally, the vast majority of fund managers now agree that it's time to switch back to equities, in terms asset allocation, play the cyclicals and the industrials," said David Thebault, head of quantitative sales trading, at Global Equities.

"In that sense, there's a serious risk of correction in the fixed income market. But even with sentiment improving, we should expect a bumpy road for stocks in the next six months. As a protection, I'm buying volatility, which is extremely cheap at the moment."

The Euro STOXX 50 Volatility Index, or VSTOXX, Europe's widely used measure of stock market risk aversion, has tumbled nearly 60 per cent since early June.

The VSTOXX - which is used to measure the cost of protecting stock holdings against corrections - hit a 5-year low of 14.9 last month, with a number of market players seeing the sharp drop as a sign of rising investor complacency.

Nokia jumped 11 per cent on Thursday after unveiling strong sales of Lumia smartphones, sparking a short covering rally. The struggling cellphone maker has 17 per cent of its shares out on loan, according to Markit data, making it one of the most 'shorted' stocks in Europe.

Reuters