European blue chip shares fell on Tuesday, paring the previous session's sharp gains, as Spain's economic woes weighed on banks and investors were cautious before the release of minutes from the U.S. Federal Reserve's latest meeting.

Spain's IBEX shed 2.7 percent, underperforming the pan-European FTSEurofirst 300 which fell 1.1 percent to 1,072.87 points.

The FTSEurofirst enjoyed it's biggest one-day gain in three weeks on Monday, after strong manufacturing data from the United States and China boosted hopes that major companies would benefit from rising demand in those markets, offsetting worries about the economic outlook for Europe.

On Tuesday, however, the index of top European shares closed below its 50-day moving average support level at 1,074, with upside resistance also seen around the 1085 level, roughly where the 14 and 20 day moving averages converge.

The FTSEurofirst is fairly valued, according to its 14-day relative strength index, suggesting bulls might struggle to find much more support around this level without further catalysts.

SPAIN CONCERNS

Fears over Spain were reignited after the government said country's debt levels would jump to their highest since at least 1990 this year as the economy sinks into recession and borrowing costs rise.

That hit sentiment on European banks, which have rallied 13 percent in 2012. Spain's Banco Santander and BBVA fell as much as 4.5 percent, while Italy's Unicredit and Brussels-listed KBC Groep shed up to 5.4 percent.

A trader in Milan said sentiment surrounding banks had deteriorated significantly since concerns about Spain flared up again in February, when it shocked markets by saying it had missed its 2011 budget deficit target and a few days later set itself a softer goal for 2012.

Those worries were reflected in the debt market where yields on 10-year Spanish government bonds crept higher on Tuesday, with Portuguese debt also emitting signs of contagion.

Sovereign debt restructuring in Spain is unlikely. But to ensure debt sustainability, more radical fiscal and structural measures are likely to be required, Citigroup said in a note.

More austerity will crimp the earning power of company's with large exposure to Spain.

Spanish transport infrastructure company Ferrovial was the worst performer in Europe, plunging 6.4 percent in heavy volumes, with traders saying the company was a proxy for the Spanish economy and business would slow if Spain weakened.

CAUTION FIRST

Slightly weaker-than-expected U.S. factory orders data dampened sentiment on Wall Street and affected Europe's blue chip shares.

There was also caution ahead of Federal Reserve minutes due at 1800 GMT when investors will look to see what, if any, measures were discussed at the latest policy meeting with respect to further quantitative easing.

I'd be fairly astonished if there's anything market moving in these minutes, although with inspiration running dry from other sources I expect people will be looking for something there but I doubt they'll find it, Ian Williams, equity strategist at Peel Hunt, said.

With growth in the develop world negligible, investors continue to hunt for stocks with broader geographical reach.

Britain's Burberry, favoured for its big exposure to Asian growth, gained 2.1 percent, as Investec Securities updated its model and forecasts for the British luxury goods group, reiterating its buy stance on the stock.

And with risk appetite among investors waning on Tuesday, many of the top gainers had a defensive bias.

Denmark's Novo Nordisk, the world's biggest insulin producer, rose 2.4 percent as the group played down concerns over potential delays for the launch of an obesity drug in the United States.

Novo Nordisk has reiterated its expectations for a 2014 launch of diabetes drug Victoza, which will be used as an obesity drug in the United States.

Belgian pharmaceutical group UCB rose 1.5 percent after the firm said its drug Neupro had gained U.S. regulatory approval for use in the treatment of advanced-stage Parkinson's and restless leg syndrome.

French power company EDF rose 3.4 percent on large volumes, the biggest gainer on the French blue-chip CAC40 index , after Kepler raised the state-controlled utility to buy from reduce.