* FTSEurofirst 300 down 0.3 pct, Euro STOXX 50 down 0.9 pct * Italy's stocks sink, debt yields rise as Monti resigns * Euro STOXX volatility index surges 8 percent PARIS, Dec 10 (Reuters) - European shares fell early on Monday, retreating from an 18-month peak hit last week on worries over Italy's economy after Prime Minister Mario Monti said he would resign. At 0914 GMT, the FTSEurofirst 300 index of top shares was down 0.3 percent at 1,129.02 points, halting a sharp three-week rally that had propelled it to its highest level since early June 2011. On Saturday, Monti announced he would quit once the 2013 budget is approved. The news came two days after Silvio Berlusconi's party withdrew parliamentary support for the technocrat government and hours after Berlusconi said he would run for premier again. "The stress is back, we're asking ourselves again: 'which stock has exposure to Italy?'," Said David Thebault, head of quantitative sales trading at Global Equities. "Monti is the one who managed to stabilise Italy and stop the contagion from Greece. His surprise resignation brings back the political risk in the equation, something we had forgotten about. But all in all, this is a bit of profit taking, and the positive medium-term scenario for stocks remains intact." Milan's FTSE MIB index sank 3.2 percent - suffering its biggest drop in six weeks - with Banco Popolare down 6.3 percent and Mediobanca down 5.6 percent. Italy's 10-year bond yield surged to 4.8 percent. The news also knocked other European banks, with BNP Paribas falling 3 percent, Credit Agricole down 2.9 percent and Banco Santander down 2.4 percent. The Euro STOXX 50 Volatility Index, or VSTOXX, a widely-used measure of investor risk aversion, jumped 8 percent to a two-week high of 18.6. But despite Monday's pull-back, a number of traders and fund managers remained confident about the outlook for equities. "The return of the political uncertainty shouldn't drag stocks further down," Barclays France director Franklin Pichard said. "Investors still believe that fiscal (conditions)... will continue to dictate politics across Europe. This news doesn't change our appetite for Italian equities." The euro zone's blue chip Euro STOXX 50 index was down 0.9 percent, UK's FTSE 100 index was down 0.2 percent, Germany's DAX index down 0.4 percent, and France's CAC 40 down 0.6 percent. The Euro STOXX 50 has surged about 25 percent in the past six months, as bold measures unveiled by the European Central Bank to resolve the debt crisis have soothed fears of a break-up of the currency bloc.