* FTSEurofirst 300 and Euro STOXX 50 drop more than 2 pct
* DAX down more than 3 pct as weak China data hits markets
* Ferrari shares slip on Milan debut
* Euro STOXX 50 Volatility Index rises (Updates prices)
By Sudip Kar-Gupta
LONDON, Jan 4 (Reuters) - European shares fell sharply on Monday, the first trading day of 2016, as weak Chinese data weighed on world stock markets and a rebound in oil prices added to market volatility.
The pan-European FTSEurofirst 300 index lost 2.4 percent by 1059 GMT, its biggest one-day drop since a 3.3 percent decline on Dec. 3.
The euro zone's blue-chip Euro STOXX 50 index declined by 2.6 percent. Germany's DAX slumped 3.5 percent.
China's factory activity contracted for the 10th straight month in December and the decline accelerated compared with November, a private survey showed.
Chinese and Asian shares slumped, with China's benchmark CSI300 share index tumbling 7 percent on Monday, prompting the stock exchange to halt trading for the rest of the day.
Mining stocks fell, since China is the world's biggest consumer of metals.
Oil prices also rebounded from previous lows as tensions escalated in the Middle East following Saudi Arabia's execution of a prominent Shi'ite cleric. Market volatility increased, with the Euro STOXX 50 Volatility Index gaining ground.
JP Morgan's equity strategist Mislav Matejka said he would stay "overweight" on euro zone equities, given signs of an economic recovery in the region. But he was more cautious on equities overall, citing tensions in the credit market and a weakening in the U.S. stock market.
"We would look to use any strength as an opportunity to reduce equity allocation," Matejka said. He advocated selling out on any move up.
Shares in Ferrari fell in their debut in Milan on Monday as the luxury sports-car maker completed its spin-off from parent Fiat Chrysler.
French conglomerate Bouygues outperformed to rise 2 percent after a media report that Orange was closer to buying Bouygues' telecoms arm for 10 billion euros.
Air France KLM shares rose by 3.7 percent after Bank of America Merrill Lynch upgraded its rating on the stock to "buy".
Today's European research round-up (Additional reporting by Danilo Masoni; Editing by Keith Weir, Larry King)