Fresh worries over Cyprus' bailout problems weighed on European equities on Friday, with a key regional index at risk of recording its worst weekly drop since November.

Investors erred more on the side of selling stocks on signs of any rally rather than buying on the dip due to uncertainty over how the Cypriot situation would be resolved.

Equity markets recovered from earlier intraday lows after Cyprus's presidency said there was an agreement with Greece on a takeover of the Greek units of debt-ridden Cypriot banks.

But Russia rebuffed Cypriot requests for help, raising doubts that Cyprus would secure cash to fix its debt problems.

The pan-European FTSEurofirst 300 index was flat at 1,190.72 points by around midday and at risk of recording its biggest weekly drop since November.

The euro zone's blue-chip Euro STOXX 50 index edged up by 0.2 percent to 2,689.78 points, but was still down around 1 percent from last week's close.

Cyprus needs to find 5.8 billion euros ($7.50 billion) in new money by a Monday deadline to clinch a European Union bailout, having earlier rejected a plan to raise the funds by taxing bank customers' deposits. If it cannot do so, it risks a collapse of its financial system that could push it out of the euro zone.

Most investors expect an eventual deal to help Cyprus, leading the majority to believe that any equity market fall in March and April will be a temporary one before stock markets resume an upwards trajectory as the year progresses.

In the near-term, however, investors were unwilling to take on the risk of adding significantly to equity holdings.

"The market is in a neutral to bearish phase at the moment,» said XBZ Ltd European equity options broker Mike Turner.

Turner said clients had been buying «put» options, which give the right to sell an index in the future and are often used on expectations of a future market fall.

He said investors had been buying «puts» on the Euro STOXX 50 due to expire next week with strike prices ranging from 2,600 to 2,500 points - implying that some saw a possible 7 percent fall on the Euro STOXX 50 over the course of next week.

"People are keen to acquire a bit of downside protection into next week,» he said.

[Reuters]